Taylor says he’s looking for the dividend growth to come from predictable topline cash flow growth, not because the company has excessive cash on the balance sheet and just wants to scrape it off the books. “It only works for the long-term if the business can consistently grow.”

Apple, he notes, is one company that had too much cash for too long doing nothing. He says tech companies have come around to dividends, but belatedly. “We own Microsoft. They have more than a 10-year record of dividend increases.” But he adds, “They should probably have more than a 20-year record.”

Brave New World
Tech companies, once the stingiest of corporations when it came to paying back their shareholders, have now become more shareholder friendly—and after a decade or so of virtue, they are migrating into the portfolios of dividend managers, who are newly confident about these prodigal payers’ willingness to shell out after getting nudges from activist investors and building 10-year track records of dividend growth. In April, Apple raised its dividend to $2.08 a year, an 11% increase, which made it the biggest dividend payer in the S&P when measured by total dollars distributed to shareholders, according to Bloomberg.
That would make it a plum play for dividend investors, it would seem. The company had $193 billion in cash, according to its April 2015 10-Q.

So the world has changed, right? Not enough to convince Peters at Morningstar. He says he’s been burned in the past by companies that have promised hefty dividend payouts, only to cut them when there is trouble. That’s made him gun-shy about Microsoft, Apple and Intel, none of which he currently owns. He even got rid of Intel when it was throwing off lots of money and about to go off on a price surge.

“With [Intel’s] dividend up 6.7% this year, selling in early 2014 was a mistake,” Peters wrote in Morningstar’s Dividend Investor newsletter. “But unpredictability/cyclicality highlight difficulty finding reliable [dividends] in tech.”

To Financial Advisor, he says, he was for a time a bit more open minded. “The way I look at a company like a Microsoft or an Intel or a Cisco, these are not growth companies anymore. What are they? They are cyclicals. They are kind of curious cyclicals in that they have still pretty high profit margins and high returns on capital and giant hoards of cash that you don’t find among, say, a GE or a UBS or more traditional industrial/cyclical types of businesses, but you still have exposure to economic cycles.”

That doesn’t augur well for sustained payouts in a possibly stagnant business, especially like PCs in the tablet and iPhone era. Microsoft increased its dividends plenty over the years so that its yield rose from a low 1% area to a solid 2.5% only 10 years later, yet Peters asks, “What is becoming of all of the cash that they aren’t paying out as dividends? Is it benefiting you as a shareholder or is it just piling up in idle offshore accounts or is there the risk that they go on to make a bunch of acquisitions that destroy shareholder value?” He, too, suggests the dividend could have been two, three or four times what it has been.

Casey Sambs and Kenneth Conrad, portfolio managers of the BMO Dividend Income Fund, say they’ve been managing a dividend-focused strategy for separate accounts since 2002 and their mutual fund for three years. Their strategy looks for undervalued companies from the S&P with a dividend yield of greater than 1%, and the goal of the entire portfolio is to have a dividend yield more than 1% higher than the S&P 500 (which is about 2%).

The fund had 79 stocks as of May but usually has 55 to 80, and it keeps band constraints around the sectors so that all of them are represented. Even though the fund is tilted toward utilities and telecom as staple dividend payers, “it’s changed over time because there is a larger opportunity set,” says Sambs. “Over the last 10 years, our investable universe has expanded by 35% given the number of companies that have initiated or grown their dividends.” That means tech is now one of the largest sectors.

Sambs and Peters both say that it’s sometimes good to hold on to companies going through problems if they are consistent payers, not only because they are dedicated to paying, but because a higher yield in a diversified portfolio is hard to replace and can offset current lower yielders, allowing you to nurture the ones set to grow.

Sambs says some telecom companies like AT&T’s and Verizon’s price war has made investors nervous about their stocks, but they both pay well (the latter has a 5.5% yield and Verizon has a 4.4% dividend yield). “The nice thing is that their yield allows us to own other companies that might have better total return prospects in the near term”—perhaps a consumer discretionary company with lower yields that is going to benefit from declining gas prices.

Peters, in similar fashion, is holding on to GlaxoSmithKline, a drugmaker with some pipeline problems whose share price has plunged and dividend yield subsequently risen to 5.2%. The firm has recommitted to a dividend through 2017, but there is no margin of earnings safety to cover it, Peters says.
“I’d like to own something else,” he says. “The question is, how do I replace that income stream?”