Cash. We could all use more of it. That’s why many investors turn to dividend stocks. The case for good dividend stocks is simple: Investors don’t need to rely solely on unrealized gains to get a return on their investment — they get to look forward to a cash deposit every quarter.
But how do you find the top dividend stocks? You’ll need to muster up some contrarianism and look where others aren’t. If you want abnormal returns, you’ll need to act abnormally.
Where to search
Let’s begin by looking at some megacap tech-leaders. In doing so, you’ve already (a) identified an undervalued sector many investors have abandoned and (b) narrowed your search down to the leaders in their respective industries. Particularly, let’s look at Apple Inc. (NASDAQ:AAPL) and Intel Corporation (NASDAQ:INTC), two excellent businesses that have been battered and bruised over the past year.
Top dividend stocks need more than just a good dividend yield — they need to be enduring businesses. A dividend yield won’t get you anywhere if your principal takes a nosedive.
Most enduring businesses have two things in common: market leadership and consistently high returns on invested capital to prove it.
Apple Inc. (NASDAQ:AAPL)’s market leadership is as clear as day. If there’s a definite duopoly in any industry, it’s in handsets. Apple and Samsung, together, captured 100% of the industry’s worldwide profits in the first quarter of 2013, according to Canaccord Genuity. Apple took the lead with 57% of profits, and Samsung followed behind with 43%. But Apple Inc. (NASDAQ:AAPL)’s share of profits is quite surprising, given that it captured only 8% of the global handset market share.
Intel Corporation (NASDAQ:INTC)’s leadership comes from its economies of scale. As the world’s largest semiconductor company by far, it has far more money to spend on research and development and also has cutting-edge manufacturing capabilities. To add some perspective to just how significant Intel’s economies of scale really are, compare its market capitalization of $118.4 billion with that of its closest competitor, Advanced Micro Devices, Inc. (NYSE:AMD), at just $2.9 billion.
Furthermore, Apple Inc. (NASDAQ:AAPL) and Intel Corporation (NASDAQ:INTC) have had above-average returns on invested capital in the trailing 10-year, five-year, and three-year periods. Today, Apple stands at a whopping 33.3% return on invested capital and Intel at a nice 17.2%. This is clear evidence that both companies benefit from competitive advantages — namely, brand recognition and economies of scale.
Top dividend stocks should be reasonably priced, to lower the risk on your principle and let you focus on the prospective income.
Apple and Intel Corporation (NASDAQ:INTC) are as cheap as market leaders come in today’s frothy stock market. Apple Inc. (NASDAQ:AAPL) and Intel’s stock prices have dropped, but measured by free cash flow yield, their ability to generate the cold, hard cash that builds shareholder value is still intact. Furthermore, measured by this metric, these two market leaders are comparatively cheap compared with other dividend-paying market leaders.