NEW YORK (CNN/Money) – Politics be damned! Some technology companies aren't waiting to see whether President Bush's dividend taxation relief proposal makes it through Congress.
Microsoft announced last month that it would use some of its $43 billion cash hoard to start paying a dividend, beginning in March, with a yield of about 0.3 percent.
And Tuesday, wireless technology company Qualcomm also said it would begin to pay a dividend in March. The company declared a quarterly dividend of 5 cents a share. That works out to a yield of about 0.5 percent.
Granted, those aren't as juicy as, say, the 4.1 percent yield you can get from Baby Bell Verizon. But since technology companies traditionally have resisted paying dividends, even the tiniest yield is noteworthy.
"All things being equal, if I can get a small yield compared to a company paying no dividend, then why not?" says James Denney, manager of the Electric City Dividend Growth fund. "These dividends are fairly modest, but if the companies start to develop a reputation of increasing them on a consistent basis that would be significant." Denney does not own Microsoft or Qualcomm but says they are now on his radar screen because of the dividend.
Forget about the tax debate
To be sure, investors shouldn't start rushing into stocks just because they might pay a tax-free dividend. In fact, not all dividends will be tax-free. For more about how Bush's dividend tax proposal affects the individual investor, click here.
| * As of the end of the latest quarter | | Source: Multex Investor |
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The larger point is whether a company feels confident enough to pay some of its earnings back to shareholders. With that in mind, expect investors to demand dividends from the more financially stable technology companies -- even if Bush's call to completely eliminate individual investors' taxes on dividends is modified.
"Many tech companies do not have a lot of debt on their books and do have a lot of cash, so they could afford to give out a dividend," says Linda Duessel, co-manager of the Federated Capital Appreciation fund. Duessel owns Microsoft and Intel, another technology company that pays a small dividend, in the fund.
So who could be next? Cisco Systems tops the list since it has no debt and more than $21 billion in cash. Cisco shareholders voted against a proposal to declare a dividend back in November, but during the company's earnings conference call last week CEO John Chambers did not rule out a dividend in the future.
Other debt-free technology companies in the S&P 500 with at least $1 billion in cash are Yahoo!, chip equipment companies KLA-Tencor and Novellus Systems and enterprise software developer PeopleSoft.
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Two other tech heavyweights set to report earnings this week, Applied Materials and Dell Computer, also have sizable cash hoards and little debt. The same can be said of Oracle, which has $5.5 billion in cash and long-term debt of just $313 million. Oracle CFO Jeff Henley said at a Morgan Stanley conference last month that it would reconsider its dividend stance if there are dividend tax changes.
Typically, these tech companies have preferred to use their cash to buy back stock in order to boost shareholder value. Qualcomm, for that matter, also announced a stock repurchase program Tuesday. But since many stock buybacks merely offset the dilutive effect of options grants to executives and employees, many investors are growing increasingly skeptical of buybacks.
"Buybacks are not music to investors' ears at the moment," Duessel says. "Please let us see some return in our pockets now."
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