Intel Corporation (INTC), Microsoft Corporation (MSFT), Cisco Systems, Inc. (CSCO): The Ultimate Dividend Growth Portfolio: Tech Edition

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A funny thing has happened over the last few years. Big tech companies, which for many years shunned the idea of paying dividends, have now started offering some of the best dividends in the market. Although these dividends are fairly new, some of these tech stocks are perfect for my Ultimate Dividend Growth Portfolio. I introduced this paper portfolio in a previous article with the aim of creating a rapidly growing dividend stream by finding the best dividend growth stocks. I started with $100,000 and so far have added four stocks, Lorillard Inc. (NYSE:LO), Kraft Foods Group Inc (NASDAQ:KRFT), General Electric Company (NYSE:GE), and Walgreen Company (NYSE:WAG). Today I’ll add four more stocks, this time from the tech sector.

Tech stocks are tricky

Because technology can change extremely fast, it’s important to only choose tech stocks that have staying power. Big, fairly diversified companies are best, and having a load of cash on the books doesn’t hurt either. You could certainly argue that the stocks I’ll add today are riskier than the previous four, but I believe they offer an excellent opportunity to capture significant dividend growth.

Intel Corporation (NASDAQ:INTC)

Credit: Demo systems with Core i5 and Core 2 Duo by Konstantin ZamkovIntel is still the king of the PC processor, but thus far it has very little presence in the mobile market. This has led to some pessimism regarding the company as ARM-based processors dominate the mobile space. On top of that the traditional PC market is in decline, as evidenced by the recent report of a 14% quarterly drop in shipments.

Of course, as less PC’s are sold more tablets and smart phones are sold, so the total number of devices continues to increase. And as Intel begins to find itself inside more of these mobile devices PC sales won’t matter nearly as much. The key is selling more chips, not where those chips end up.

Intel Corporation (NASDAQ:INTC) currently pays a quarterly dividend of $0.225 per share with a yield of 4.15%. This is the highest yield of the four stocks I’ll talk about today, and to some degree it’s so high because Intel’s stock is down about 26% from its 52-week high. Interesting, the dividend yield is now higher than the coupon rate on most of Intel’s outstanding bonds, even the long-duration ones.

Historically Intel’s dividend has grown quite fast. Over the past decade the dividend has grown at an annualized rate of 30%, although that rate has slowed substantially recently. The latest dividend hike last year only increased the quarterly dividend by 7.14%, and we should see another increase later this year.

According to my previous article a stock with a 4% yield only needs to grow its dividend at about 5.5% annually to be fairly priced, so Intel’s last increase was above the mark. Going forward, the next few years will probably be difficult ones as Intel claws its way into the mobile space. In 2012 Intel’s payout ratio was 57% of the free cash flow and 40% of the net income. This is high enough that any dividend increase in the near-term will be a result of earnings growth, as I doubt Intel wants to raise the payout ratio much further. But again, because of the high yield growth doesn’t need to be all that fast.

Based on the share price as of this writing I’ll add 230 shares of Intel Corporation (NASDAQ:INTC) to my Ultimate Dividend Growth Portfolio with a cost basis of $4,986.40. This position will generate a projected annual dividend payment of $207. If the stock price rises back near its 52-week high, pushing the yield down closer to 3%, I’ll probably dump Intel in favor of a faster growing dividend stock. But the yield right now is too tantalizing to ignore.

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