Part of the allure of dividend-paying stocks is that they pay back your initial investment directly. Ten years after the tech bubble, many tech stocks now offer attractive dividend payments. Has the tech sector become attractive to income investors who wish to be paid back without having to sell their shares in the secondary market?
Calculating Payback Periods
The number of years it takes for an investment to pay you back is called the payback period. It is a simple and crude measure of risk. Other investment metrics like required return do not always match up to the calculated payback period. This is because required return takes into account how dividend distributions in earlier years are worth more than the same dollar value paid out later in the future. (You would be able to reinvest the earlier distribution and earn a return on it, making it worth more.)
Payback period estimates depend on earnings growth and dividend payout ratios. Payout ratios were assumed constant, and dividend was projected by taking the minimum of the following:
- Earnings growth over the past five years
- Analyst estimates for earnings growth for the next five years
- Return on equity times the earnings reinvestment rate
The minimum of these measures was then used to estimate dividend growth for the next three years.
Tech stocks were screened for dividend payback within two decades, dividend yields in excess of the 10-year treasury yield and payout ratios below 60%. The values of these inputs are provided below:
Ticker | Company | Div Yield | Payout Ratio | EPS growth past 5 years | EPS growth next 5 years |
BRKS | Telecom Argentina S.A. | 2.7% | 4.1% | 45.0% | 18.0% |
CA | DDI Corp. | 3.7% | 10.6% | 42.6% | 9.7% |
CHL | Siemens AG | 4.0% | 43.1% | 17.1% | 2.4% |
DDIC | Persero Indonesia Tbk. | 4.9% | 41.3% | 66.8% | 15.0% |
INTC | STMicroelectronics NV | 3.2% | 31.4% | 22.8% | 10.6% |
RCI | Taiwan Semiconductor Manufacturing | 3.7% | 48.5% | 29.8% | 9.3% |
RIMG | CA Technologies | 5.6% | 41.8% | -6.2% | 10.0% |
SI | SK Telecom Co. Ltd. | 4.0% | 40.8% | 24.2% | 21.2% |
SKM | TIM Participacoes S.A. | 5.8% | 48.8% | -4.8% | 7.9% |
STM | TELUS Corporation | 5.9% | 54.4% | -2.9% | 21.1% |
TEO | Rogers Communications Inc. | 8.1% | 37.4% | 11.3% | 10.1% |
TLK | Rimage Corp. | 5.0% | 4.8% | 8.5% | 8.7% |
TSM | Brooks Automation Inc. | 3.7% | 54.2% | 17.4% | 15.0% |
TSU | China Mobile Limited | 4.5% | 18.0% | 66.7% | 4.0% |
TU | Intel Corporation | 4.2% | 58.1% | 12.3% | 7.1% |
Abnormal growth will not last forever, and analyst estimates, as informed as they are, are not predictive indefinitely. To address this limitation, a terminal 3% dividend growth rate was applied for every stock in the list after three years of projected growth rates. (Predicting economic growth many years out is impossible, and 3% seemed like a reasonable value.)
Many tech sector stocks have distribution rates, which are high enough that the sum of future dividends would equal your initial investment inside of two decades:
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