This year has been historic for the stock market. The coronavirus pandemic has wrought drastic changes in consumer behavior that will likely continue long after it’s a distant memory. E-commerce has accelerated, streaming video and music are experiencing increased adoption, and video games have seen a resurgence.
It shouldn’t be a surprise, then, to learn that while the broader market has languished in 2020, technology stocks have been a hot commodity this year. The S&P 500 (SNPINDEX: ^GSPC) is near breakeven in 2020, but the tech-heavy Nasdaq (NASDAQINDEX: ^IXIC) has crushed the broader market, gaining about 18%.
Those looking to add income to their portfolio don’t need to sacrifice gains in order to ensure regular dividend payments, however. Here are three tech companies with a small but growing dividend that more than make up for a lower yield with impressive, market-beating growth.
Microsoft: A haven against the pandemic
Under the watchful eye of Satya Nadella, who took the helm at Microsoft (NASDAQ:MSFT) in early 2014, the company has enjoyed a striking renaissance. After languishing for more than a decade, the tech titan has come roaring back, becoming one of the most valuable companies in the process. The stock has gained more than 400% on his watch, with no signs of slowing.
The company has become a cloud leader in just a few short years and continues to give Amazon Web Services (AWS) a run for its money. Azure, Microsoft’s cloud computing operation, has been gaining ground on its archrival by continuing to grow at a faster pace. In the second calendar quarter of this year, revenue from AWS grew just 29% year over year, while Azure climbed 47%. It may not be an apples-to-apples comparison, but it does show that Microsoft is closing the gap on its industry-leading rival.
Microsoft has a rock-solid balance sheet, with more than $139 billion in cash and securities and just $63 billion in debt. The company continues to generate an impressive amount of cash, with operating cash flow of more than $18 billion in the most recent quarter, up nearly 16% year over year, helping fund its strong and growing dividend.
The payout has nearly quadrupled over the past decade, with Microsoft increasing its quarterly dividend from $0.13 in fiscal 2010 to $0.51 in fiscal 2020. The yield may seem paltry, currently sitting right at 1%, but given the stock’s impressive growth, that’s easy to understand. Microsoft uses just 34% of profits to fund the payout, giving the company plenty of leeway to expand the dividend.
Apple: On the road to becoming a dividend powerhouse
Warren Buffett has become one of Apple‘s (NASDAQ:AAPL) biggest cheerleaders in recent years, and investors looking to prosper could do worse than follow the example set by Berkshire Hathaway‘s legendary CEO. Apple stock now makes up 43% of Buffett’s portfolio.
When Apple reported results for its fiscal third quarter (ended June 27) this week, the iPhone maker shattered expectations despite pandemic-driven headwinds. Revenue grew 11% year over year, while earnings per share climbed 18%. The iPhone, which generates the majority of Apple’s revenue, edged higher, eking out gains of 1.7%.
Other segments helped with the heavy lifting, as the wearables, home, and accessories segment climbed nearly 17%, while the services segment continued to trudge higher, gaining 15%. These two higher-growth, recurring-revenue streams now account for nearly 30% of Apple’s trailing-12-month revenue.
The company boasts one of the biggest cash piles of any enterprise, with more than $193 billion in cash and securities and $113 billion in debt. Apple’s stash grows with every passing quarter, with operating cash flow of more than $60 billion in its most recent quarter, up 21% year over year, leaving little doubt that its payout is secure and will be for the foreseeable future.
You might not know it based on its yield, but Apple is becoming a dividend powerhouse in its own right. Since resuming its payout in 2012, its dividend has climbed more than 116%, from a split-adjusted $0.38 eight years ago to $0.82. The company uses less than 25% of profits to fund the payout, giving Apple plenty of resources to ensure its future growth. Because of the stock’s growth spurt, the dividend yield has fallen below 1%. In its defense, Apple stock has risen nearly 400% since the resumption of its dividend, so we can probably cut it a little slack.
Apple just announced a 4-for-1 stock split, which might change the numbers, but not the underlying payout.
NVIDIA: Early in its dividend journey
There’s little question that cloud computing was booming even before the pandemic, but the need to keep employees working remotely has given the trend an additional boost. Graphics processing units (GPUs) perform the complex mathematical calculations that are now a staple in artificial intelligence (AI), as well as in cloud computing and data centers. As the leading supplier of GPUs for these applications, NVIDIA (NASDAQ:NVDA) has seen a surge in demand for its products — even before the pandemic reared its ugly head.
That was evident when the company reported the results for the three months ended April 26. Revenue of more than $3 billion grew 39% year over year, with record data-center revenue climbing to $1.14 billion, up 80%. That drove profits through the roof, with EPS of $1.47 growing 130%.
NVIDIA’s balance sheet is solid, with $16.35 billion in cash and marketable securities, and about $7 billion in debt. The company continues to generate copious amounts of cash, with operating cash flow of $909 million in the most recent quarter, up 26% year over year, providing plenty of resources to fund the payout.
The payout has climbed 113% since NVIDIA began its dividend journey in 2012, growing from $0.075 to $0.16 this year. The yield is barely noticeable, currently sitting right at 0.15%, but NVIDIA’s stock has gained 3,000% since it began paying a dividend, so a little leeway on the yield is surely in order. NVIDIA uses less than 12% of profits to fund the payout, providing the company with resources to give the dividend a sizable boost at some point in the future.
A bit of perspective
It’s important to note that while there are plenty of other stocks with higher yields, these tech giants more than make up for their smaller payouts with market-beating gains. Each company has easily outpaced both the tech-heavy Nasdaq and the broader S&P 500 so far this year. More importantly, each stock has solidly beaten the indexes over the past 1-, 3-, 5-, and 10-year periods.
Oh, and did I mention they also pay a dividend?