Cheap Tech Stocks With Dividends

| November 3, 2014 | 0 Comments

technologyWhat makes a cheap tech dividend stock? How do you find one that’s good?

And when does it make sense for you to invest in a cheap tech stock?

Good questions. And the good news is that time is on your side… this is an excellent time for investors to look at cheap tech stocks with dividends.

That’s because the tide is turning. There’s a huge shift underway. A historic shift that you can profit from.

Here’s how…

Up until now, tech companies have been brash, young upstarts. They’ve been scrambling to compete and plowing a big percentage of their profits back into research and growth.

Many of these companies are finally growing up… they’ve hit the point they can afford to start paying dividends… and in a big way.

Look at Apple (AAPL). When you add up the dollars paid out, Apple is the #2 dividend paying stock on the S&P 500. (Exxon Mobil is #1.)

Amazing when you consider that before 2012, you had to go back to 1995 to see Apple pay a dividend.

So that’s the kind of historic shift that’s underway. And it’s a shift you can profit from.

What Makes A Cheap Tech Stock That Pays Dividends?

What does cheap really mean?

How do you know the cheap tech stock you’re investing in just doesn’t seem cheap?

There are two easy ways to tell.

Your first great benchmark is the Price Earnings Ratio. This number tells you how much you’re paying for earnings. And when you buy a stock, that’s what you’re buying… earnings.

Earnings make dividends possible. Earnings keep the doors open and make the business profitable.

Let’s say you buy tech stock A for $10 and each share of stock earns $1 a year.

Then you buy tech stock B for $20 and each share earns $1 a year.

Tech stock B is twice as expensive as tech stock A. But that’s not because $20 is twice as much as $10… it’s because the earnings are the same. You get the same $1 of earnings with each. But you pay twice as much for that dollar with tech stock B.

Now, let’s say tech stock B delivered earnings of $2 per share. Then it would be the same value as tech stock A.

So it’s not the share price that you look at to see if you’re buying cheap… it’s the relationship between the share price and the earnings. This is how the Price Earnings Ratio works. And when you start using the P/E Ratio to figure out if the stock you’re thinking about is cheap, you’ll know exactly where you stand.

What’s a cheap P/E Ratio and what’s an expensive one?

Measure the overall market. Take all the stocks trading on the market, lump them together, and get an average.

Right now, the P/E ratio for the S&P 500 is 17.

For tech stocks on the NASDAQ, it’s 16.

A basic rule of thumb is you get a cheap stock when the P/E is below the market average.

So take a look at a few tech stocks that pay dividends… and not many of them do… and you’ll see what’s cheap and what’s expensive.

Apple has a P/E of 16.6, Intel (INTC) is at 16.1, and IBM (IBM) is at 13.2.

There you go… IBM is a deal. But hold on for a second, because there’s another number you want to know.

Your cheap tech stock needs to give you a good price for the earnings and a good price for the dividends you’ll be paid.

This price is your yield, and the higher the yield, the cheaper the stock. Once again, we need a number to compare the stock’s yield to, so we’ll go back and look at the overall market.

Right now, the average yield for all the S&P 500 stocks is 1.8%.

For tech stocks on the NASDAQ, it’s 2.6%.

Apple has a yield of 1.8%, Intel is at 2.9%, and IBM is at 2.7%.

If you invested on yield alone, Intel would win. But you need to look at both yield and the P/E Ratio. Even though Intel pays a slightly higher yield, when you combine both benchmarks, IBM is the cheap tech stock that comes out best.

But to really make sure the stock is cheap, there’s one more thing to shake down… 

Where the company is going.

What its future prospects look like. What kind of competition it will tackle in the next few years. How much demand there will be for its products or services.

Is the company headed for trouble? Is it well run? Is its financial house in order… not too much debt, a good chunk of cash on hand? Are expenses trending up or down?

When you ask these questions, you’ll find out why IBM is the cheapest of the three tech dividend stocks we’ve looked at. That’s because IBM is at a crossroads. It’s in the process of reinventing its business model.

On the other hand, Apple looks like it will enjoy plenty of smooth sailing ahead. That’s why the yield is low and the P/E Ratio is high. The same with Intel.

Investors pay a premium for safety. It all comes down to risk and reward, and you’ve just seen this truth come to life in these numbers.

So what about the risk and reward of cheap tech stocks?

Why You Want To Invest In Cheap Dividend Tech Stocks

More and more tech stocks are starting to pay dividends. There are a lot of deals out there because P/E ratios have come back down to earth. You see this when you compare the overall price of tech stocks against the general market.

And tech stock yields are higher.

Technology is a great business to be in. It isn’t going away, and profitable new opportunities keep coming up.

Look at the cloud. Five years ago, hardly anyone knew about Dropbox. Last year, Dropbox hit the 200 million user mark.

And don’t forget… history is on your side. A lot of tech companies are growing up. They’re becoming financially mature. Look for more and more tech stocks to start paying dividends.

How To Find Cheap Dividend Tech Stocks

First, look on the NASDAQ. This is where most tech stocks are listed.

Pick out the tech stocks that pay dividends. Look at their P/E ratios and zero in on the ones with a P/E ratio that is below 16.

Then, look at the dividend yield. Any yield above 2.6% and you’re golden.

Now, do some homework and get a sense for where the company is going. Factor in your own threshold for risk so you don’t chase after too high a yield.

And don’t forget…

Tech changes in a hurry. Companies like Dropbox come out of nowhere.

The cloud is turning those mainframes that used to pump profits into IBM into dinosaurs.

And dinosaurs aren’t very good at paying dividends.

IBM (IBM)

Dividend Yield: 2.69%

Annual Payout: $4.40

Payout Ratio: 27.3%

 

Apple (AAPL)

Dividend Yield: 1.75%

Annual Payout: $1.88

Payout Ratio: 25.0%

 

Intel (INTC)

Dividend Yield: 2.65%

Annual Payout: $.90

Payout Ratio: 40.2%

 

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Category: Dividend Basics

About the Author ()

Michael Jennings writes and edits DividendStocksResearch.com showing how you can profit from dividend stocks. His passion for stocks and especially Dividend Stocks began at an early age. Now he shares his knowledge and wisdom with anyone who asks... He shows beginning investors, retirees, and even trading pros how to create regular income by investing in dividend stocks, easily, step-by-step! You can Sign up for his free Dividend reports and dividend newsletter at http://www.dividendstocksresearch.com/free-sign-up

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