Tech stocks have historically not offered dividends. Oftentimes they use their cash to buy other companies in their sector, buy back shares or put it into research to create more products. In fact, offering dividends has often been seen as a sign of weakness in tech companies.However, that's begun to change, and we are seeing more tech companies handing out cash on a regular basis as their profits and growth have stabilized. At Stockpickr we keep track of the Top 10 Yielding Tech Stocks, updating this portfolio on a regular basis. All 10 stocks are specifically selected not only because they offer good dividends but also because the payout ratio is less than 1 (they pay less in dividends than they earn) and the prospects for growth are strong. United Online ( UNTD) pays out a 6% yield and is grossly undervalued. The company has a $900 million market cap but has $154 million in cash in the bank with no debt. Its EBITDA (earnings before interest, taxes, depreciation and amortization), or cash flow, was $137 million over the last 12 months. So the company is trading at only five times cash flows, making it a buyout target. Furthermore, a key asset for the company is Classmates.com, one of the largest social networks on the Internet. And I'm not the only one who thinks so. Hedge fund Renaissance Technologies -- up 30%-plus a year since the early 1990s -- also owns a piece of United Online.
You can see other Renaissance holdings here; I plan on offering an in-depth look at them next week. To judge from its holdings, it seems that Renaissance has come up with a formula that says buying companies with heavy cash and no debt has a good margin of safety. For instance, another holding is Synopsys ( SNPS), which has $572 million in cash (for only a 3.7 billion market cap) and zero debt. As an aside, someone who had $40 million invested with Renaissance told me I would like them, saying that "they even study what happens to the markets when it snows." I figured that I could do that, too, and the result can be found in the Active Trader section on Stockpickr in our Blizzard System. Nam Tai Electronics ( NTE), with a 9.4% dividend, is also an interesting play. The company is valued at $664 million by the market but has $238 million in net cash in the bank and almost $70 million in cash flows, so it is trading at only a little over six times cash flows. That's cheap enough to make it a buyout target. Even though Nam Tai hands out almost $60 million in dividends, its operating cash flow is over $100 million. So the company has plenty of cash left over to pay that 9% dividend. The six analysts covering the stock think it will earn $1.13 a share in 2007, up slightly from $1.10 in 2006.
Another name on the Top 10 list is Microchip Technology ( MCHP), which has almost $1 billion in net cash, spins off $485 million a year in cash flows, and has a 3.1% dividend yield. What's interesting here is that the past 14 times the company has issued a dividend, that dividend has been higher than the prior one, so I expect that 3.1% yield to increase. For the full list of top funds owning Microchip Technology, click here. One fund that I'm a fan of that also owns Microchip Technologies is the Wasatch Global Science and Technology Fund, which was up 16% in 2006. To see the remaining seven stocks on the Top 10 Yielding Tech Stocks, please check out the portfolio page on Stockpickr. You can receive email notification when the portfolio is rebalanced by rating it with four stars. Stockpickr Tip of the Day: One thing to note about the recommendations algorithm: For each portfolio, we find all the portfolios -- pro and otherwise -- that are highly correlated with yours, and then we find five recommendations. The first three are stocks that are well-loved by the portfolios correlated with yours. The second two are also holdings of the portfolios similar to yours but are intended to be more speculative. If you haven't tried Stockpickr yet, you can check it out here.