Cisco Dividend Initiation Very Overhyped

I was fairly surprised how much positive press Cisco Systems (CSCO) received this week after CEO John Chambers announced that the company would likely begin paying a dividend in fiscal 2011. Market commentators acted as if this was hugely important news, not only to Cisco shareholders but market players in general. Really?

Chambers said the dividend would likely fall in the range of 1-2% per year. Considering that most other large tech companies pay meager dividends already (Microsoft, Oracle, IBM, H-P, and Qualcomm all pay ~1-2%), coupled with the fact that the S&P 500 yields a little bit above 2%, I think this announcement is both unimpressive and unimportant. I doubt Cisco shareholders are jumping for joy at the prospect of a 1.5% annual dividend (perhaps 3-4% would be a different story, as it would represent a large portion of their expected long term return) and they shouldn’t be. And for the investment strategists who claim that income-oriented investors will now all of the sudden flock to Cisco shares, they are clearly overstating the situation. A dividend of 1.5% simply is not high enough to wet the appetites of income-seeking investors. In fact, a portfolio manager running a growth and income fund probably already averages a 2% yield or more in their portfolio (the average dividend for the market), so adding Cisco stock will actually lower their total portfolio’s yield.

Until tech companies start paying dividends that rival those in sectors notorious for fat dividends, such as consumer staples and utilities (3-5% per year), there will be little reason for income-seeking investors to all of the sudden embrace technology stocks. Intel (INTC), with its current 3.4% dividend yield, has crossed over into that territory, but others such as Cisco have a long way to go.

Full Disclosure: Long Intel and no position in Cisco at the time of writing but positions may change at any time