When putting together an income portfolio, one must search for great companies with little risk, and big annual distributions to shareholders. Basically, you would want a collection of assets that pay out enough for you to settle your everyday expenses, even if growth rates are not as high as in growth stocks. The real appeal here resides on lesser risks and larger certainties
The desired companies must combine strong fundamentals and valuation; not only should you look at earnings growth and returns, but also at current pricing and dividend yields.
Dividends and an acquisition spree
Cisco Systems, Inc. (NASDAQ:CSCO) offers IP-based networking solutions to most Internet companies, corporate, education, and government networks worldwide. Despite a strong upsurge in its stock price in May (after an impressive earnings beat), its valuation is still attractive at 14 times its earnings, at under half the industry average. Offering industry leading margins and returns, a 2.63% projected dividend yield, a widely moated business model and compelling growth prospects, this stock is one to buy and hold for the long-term.
Over the last two years, Cisco Systems, Inc. (NASDAQ:CSCO)’s dividends have tripled and this trend is not expected to end yet. Holding around $40 billion in highly liquid short-term investments, another $6.8 billion in cash and a low debt-to-equity ratio, dividend hikes should continue, reinforced by regular share repurchases.
In addition, its strong balance sheet will allow the firm to pursue strategic acquisitions, which have proved to drive growth in the past. Particularly, management continues to focus on purchasing smaller firms in an attempt to further penetrate the software industry, as proven by the recent announcement of Cisco Systems, Inc. (NASDAQ:CSCO)’s intentions to buy Composite Software for $180 million. In the long-term, integration of these companies will drive revenue growth and increase synergies.
There’s no such thing as a forbidden fruit
Apple Inc. (NASDAQ:AAPL) is one of those companies that do not need an introduction. Across the globe, people know about the latest gadgets released by the company founded by the late Steve Jobs. After announcing a wide array of new and enhanced products and services at the keynote address for its Worldwide Developer Conference, the company still seems poised to grow, delivering above average EPS growth rates over the next five years.
Recently trading between $424 and $450, however, the stock price can discourage many investors from chipping in. Nevertheless, valued at 10 times its earnings, this stock trades at a slight discount to the industry average. Offering a projected dividend yield of 2.9% and profitability and growth figures way above its peers´, this is a stock to buy and hold–a retirement stock.
Going forward, the increasing demand for smartphones and tablets should drive demand, while innovation should continue to drive revenue growth as these innovations come to market. Moreover, increasing switching costs help the firm retain clients and increase cross-selling capabilities. In other words: “for each iOS device purchased, customers may be less likely to switch to another provider and more likely to buy another Apple Inc. (NASDAQ:AAPL) product, which could be a good sign for Mac sales, even in a soft PC environment” (Morningstar).
A storage leader in changing times
Western Digital Corp. (NASDAQ:WDC) develops and manufactures storage products, leading the global hard-disk drive (HDD) industry. Although HDDs are expected to continue to dominate the market for a while, mainly due to their pricing, the future of storage devices stems on solid-state drives (SSDs) and other flash-based platforms.
Although a late entry to this segment has worried investors, I believe that the company has plenty of time left to construct its SSD capabilities. Western Digital Corp. (NASDAQ:WDC) started to build out its SSD segment with the purchase of SiliconSystems in 2009 and further solidified its position in 2011, through the Hitachi GST acquisition. The recent decision to buy STEC, Inc. (NASDAQ:STEC) for $340 million in cash certainly looks like a step in the right direction. Furthermore, its cloud-based business will also help drive the demand for new drives.
Offering strong margins and returns while yielding 1.43% of the current stock price in the form of dividends, these shares look like a buy. Although long-term prospects are not that good, they are not bad either. Valued at 8 times its earnings, Western Digital Corp. (NASDAQ:WDC)’s shares are a bargain and upside potential is plenty. Consider adding this stock to your long-term portfolio; wait for the upside and cash on dividends, meanwhile.
Bottom line
Cisco Systems, Inc. (NASDAQ:CSCO), Apple Inc. (NASDAQ:AAPL) and Western Digital Corp. (NASDAQ:WDC) are three income stocks that have outperformed the market over the last few years and are expected to continue to deliver growth going forward, while paying out dividends in the process. All trade near or below industry average valuations while offering strong business models and plenty of room for expansion, especially in emerging economies; these are three companies that you should consider adding to your long-term portfolio.
Victor Selva has no position in any stocks mentioned. The Motley Fool recommends Apple and Cisco Systems. The Motley Fool owns shares of Apple and Western Digital..
The article A Tech Income Portfolio originally appeared on Fool.com.
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