Stocks that compute for dividend lovers

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What are we looking for?

Computer giant Dell Inc. unveiled plans this week to begin paying a quarterly dividend – joining a growing number of tech stocks in the dividend club. Microsoft Corp., Cisco Systems Inc. and Apple Inc. all introduced dividends in the past two years, adding an attractive new wrinkle to a sector that historically has relied on growth prospects rather than cash payouts to woo investors.

To mark Dell's announcement, we've created a screen to identify the dividend leaders among information technology (IT) stocks in the United States and Canada.

How we did it

We screened for IT stocks in the S&P 500 and S&P/TSX composite with market capitalizations of at least $100-million. Since both dividend yield and dividend growth are key factors for any dividend investor, we narrowed our list to companies that not only have dividend yields of at least 2 per cent, but that have also increased their dividend payments in the past 12 months.

Dell itself does not appear on the list, since it has yet to actually make a dividend payment, but once its dividends begin it would qualify – the company's planned 32 cents (U.S.) a share of annual payouts equates to a yield of about 2.5 per cent. (The first payment is slated for the third quarter.)

But Apple, which unveiled its dividend policy to great fanfare in March, wouldn't pass our screen. Its planned payouts, which also begin in the third quarter, offer a yield of 1.8 per cent at current stock prices.

What did we find?

Semiconductor maker Microchip Technology Inc. and automated-payroll-services provider Paychex Inc. are the only companies with yields topping 4 per cent. The top Canadian tech name on the list is data-management firm MacDonald Dettwiler and Associates Ltd., with a 3-per-cent yield; the company initiated payments in the spring of 2011 and increased the dividend this past spring.

Looking at the price-to-earnings multiples for the stocks that met the screening criteria, prominent names such as Hewlett-Packard Co., Western Union Co., Corning Inc. and Intel Corp. appear undervalued relative to their peers in this dividend leaders' group. However, keep in mind that stocks in the tech sector have historically been valued more on their growth potential than their income stream; you'll want to research each of these names in more detail to assess whether these relatively low P/Es really do imply attractive value.