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Payments technology giant Visa Inc. is a compelling investment because it has many tailwinds and potential for dividend growth. Visa’s growth drivers include online spending and contactless payments, which have surged during the COVID-19 pandemic.

Philippe Wojazer/Reuters

Dividends are rarely top of mind when investing in technology stocks.

After all, companies in the high-growth tech sector often just reinvest their earnings back into their businesses. Still, there are some mature companies that offer decent dividend yields or others that can grow their payouts over time.

Dividend payers can also help investors ride out bumps in this typically volatile sector, which has seen upside momentum despite market uncertainty. The COVID-19 pandemic has even been a tailwind for some technology plays.

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We asked three portfolio managers for top picks among tech stocks with payouts.

Jeffrey Sayer, vice-president and portfolio manager, NinePoint Partners LP

His fund: Ninepoint Focused Global Dividend Class

The pick: Microsoft Corp. (MSFT-Q)

Forward annual dividend and yield: US$2.04 a share (1.1 per cent)

Technology giant Microsoft is an attractive growth company with products and services that have been resilient amid the pandemic, Mr. Sayer says. The Redmond, Wash.-based firm’s transition from selling its Windows operating system and Office business software suite to a software-licensing business model with a recurring revenue stream has been key to its success. In the first quarter of 2020, Microsoft saw “double-digit growth coming out of its business, while free cash flow was up 25 per cent to US$13.7-billion,” he says. Its Azure cloud segment has been strong, while there has also been high demand for its Office 365 and Teams videoconferencing software as well as Xbox games as people worked and sought entertainment at home. Microsoft stock trades around 29 times forward earnings, but its premium multiple is justified, he says. A risk is a market rotation to value and cyclical stocks from growth or momentum plays.

The pick: Equinix Inc. (EQIX-Q)

Forward annual dividend and yield: US$10.64 a share (1.5 per cent)

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Equinix, an operator of facilities that store and transmit data, has massive growth potential due to strong demand for software, services and content over the Internet, Mr. Sayer says. The Redwood City, Calif.-based operator of more than 200 data centres in 26 countries is an information-technology (IT) related business that has a real estate investment trust (REIT) structure. “Equinix’s business is really stable with 95 per cent of its revenue that is contractual or recurring,” he says. Its hyperscale data centres includes clients, such as Microsoft’s Azure and Alphabet Inc.’s Google Cloud, which outsource part of their storage needs. This REIT trades around 25 times forward adjusted funds from operations, but the premium multiple is reasonable, he says. A market rotation from growth and momentum stories to value or cyclical businesses is a risk.

Aubrey Hearn, vice-president and senior portfolio manager, Sentry Investment Management, a division of CI Investments Inc.

His fund: Sentry U.S. Growth and Income Fund

The pick: Cisco Systems Inc. (CSCO-Q)

Forward annual dividend and yield: US$1.44 a share (3.1 per cent)

Cisco, a leader in networking switches and routers, has become a more appealing investment as it acquires more cloud-software companies, Mr. Hearn says. Software now makes up about 30 per cent of the San Jose, Calif-based company’s business. “It’s like Microsoft, [which is] selling a licence, so it’s a nice and stable, recurring revenue stream,” he says. Cisco’s Webex videoconferencing service is also doing well as people work at home during the pandemic. A risk is the cyclical nature of Cisco’s core business and clients gravitating toward cheaper “white-box” routers and switches, he says. The latter is not a concern for Mr. Hearn because of the software bells and whistles that Cisco has bundled with its hardware. Cisco is a mature business that trades attractively at about 15 times 2021 earnings.

The pick: Cognizant Technology Solutions Corp. (CTSH-Q)

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Forward annual dividend and yield: US0.88 cents (1.7 per cent)

Outsourcing giant Cognizant is poised to benefit from increased IT spending by businesses as economies re-open, Mr. Hearn says. Once a fast-growing company, the Teaneck, N.J.-based firm has struggled in recent years but is now undergoing a turnaround. Newly appointed chief executive officer Brian Humphries has hired new talent and is focused on its digital business to help clients shift applications to the cloud. Revenue began improving until the COVID-19 outbreak, which has made it difficult for its salespeople to meet clients, he says. With US$4.3-billion in cash on the books, Cognizant can also make strategic acquisitions. Cognizant’s stock trades attractively at about 14 times 2021 earnings, he says. A prolongation of the pandemic is a risk, making it challenging to help clients overhaul their IT departments.

Jennifer Radman, vice-president and senior portfolio manager, Caldwell Investment Management Ltd.

Her fund: Caldwell U.S. Dividend Advantage Fund (UDA-T)

The pick: Visa Inc. (V-N)

Forward annual dividend and yield: US$1.20 a share (0.6 per cent)

Payments technology giant Visa is a compelling investment because it has many tailwinds and potential for dividend growth, Ms. Radman says. The key to the San Francisco-based firm’s credit-card business is that it earns revenue based on the volume of transactions, but the credit risk lies with its financial-institution partners if consumers default, she says. Visa’s growth drivers include online spending and contactless payments, which have surged during the pandemic, while its “business to business platform is another significant opportunity,” she says. Given its low payout ratio of 20 per cent, Visa can easily increase it dividend. A risk is the lower cross-border spending as travel has slowed during the COVID-19 outbreak. Given that Visa’s stock trades around 38 times forward earnings and reflects a lot of its growth, its shares could trade sideways at times, she says.

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The pick: Broadcom Ltd. (AVGO-Q)

Forward annual dividend and yield: US$13 a share (4.4 per cent)

Semi-conductor giant Broadcom’s shares are more attractive now that it has diversified into the software sector, Ms. Radman says. The San Jose-based company supplies wireless chips to smartphone makers, but recent acquisitions have included Symantec Corp.’s enterprise security business, CA Technologies and Brocade Communications Systems Inc. Broadcom has become sort of a quasi private-equity firm with a portfolio of oligopoly-type businesses, she says. “With strong free cash flow generation has come dividend growth.” Broadcom’s stock trades attractively, at about 13 times forward earnings, but its dividend growth rate could come down slightly due to a rising debt from acquisitions, she says. The risk stems from the cyclicality on the semi-conductor side, but “some of the recurring revenue on the software side has helped offset that.”

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