Cisco Announces First Dividend Ever, But I’m Not Buying Any Shares

Cisco recently announced its first ever cash dividend. But I won’t be rushing to buy Cisco shares, here’s why:

1.       I look at a company’s history of paying dividends, at least 10 years or more of uninterrupted dividends.

2.       I look for a long history of increasing dividends at least 5-10 years, the more the better.

3.       I generally don’t invest in technology companies.

Let’s take a look at all 3 reasons….

 Company’s history of paying dividends

Whenever I consider shares for investment, one of the things I look at is the company’s history of dividends. I want to make sure that the company has been paying uninterrupted dividends for 10 years or more. Dividends are a strong indicator of profitability, and if a company has been paying dividends for a very long time this tells me that the company has been profitable, and gives me confidence in the company’s future profitability. Coca-Cola has paid uninterrupted dividends on its common stock since 1893. Cisco has no history of paying dividends.

Long history of increasing payments

This other thing I look at when considering shares for investment is a long history of consecutive dividend increases. By long-history I mean 5-10-20 years or more. Again consecutive dividend increases gives me confidence that the company will continue to increase dividends, or at least maintain the dividend. Dividend increases increase the return on my investment year after year. Since this is Cisco’s first dividend there is no history of dividend increases.

Technology companies

I generally don’t invest in high technology companies, because I have no confidence if the company will continue to make money 5-10-20 years from now. I have no confidence which company will build the next generation “killer” product. Technology companies spend billions of dollars a year in research and development, they’ve got thousands of engineers on staff, but no one knows who going to build the next awesome app, or the next lighting fast space age warp speed router, computer, tablet, or microscopic smart phone. Here’s a quick history lesson:

-          The iPad did not exist 2 years ago

-          4 years ago the iPhone did not exist

-          With the Sony Walkman, everyone thought Sony would be the world leader in personal music devices, then came the iPod

-          Hotbot.com, Altavista.com were once consider “the” search engines then along came Google

-          Netscape Navigator was “the” web browser then came Firefox, Chrome, Safari, IE

-          The Amiga computer was once considered the de facto standard for video editing

History is littered with technology products that no longer exist because they became obsolete. When it comes to technology no one can predict what the next big success is going to be, however we can be reasonably confident that 20 years from now people will still need to brush their teeth with toothpaste, still require toilet paper, come home every night and turn on the lights, still need to heat their homes, still purchase clothes, and so on. The essentials in life are still going to be in demand long into the future. Investing in companies that produce those essentials is key, and that is why I won’t be rushing to my broker to buy shares in Cisco.

Do you own shares in technology companies?

Full Disclosure: I do not own shares in Cisco. I own shares in Coca-Cola.

Comments

[Nina]

yeah...Nortel!

wish I had this blog post then....well written!

[The Dividend Ninja]

Kanwal,
I'm in complete agreement with your blog post here ;) However I do own Rogers Communicaitons and Shaw Communications. I have a very small position in CISCO as a speculateive value play. I like tech, but I think its safer to invest in other blue-chip stocks.

But you are correct , there is a reason why Buffett and Derek Foster don't buy technology companies ;) Toothpaste and Shampoo, Oreo Cookies, etc. will be around for a long time, as will McDonalds :) Yum! Its hard to say what will happen with Shaw and Rogers.

Cheers
Dividend Ninja

[Kanwal Sarai]

@dividend ninja, I actually think Rogers might be ok, I'd lump Rogers in the same category as Bell Canada. I know my post talks about ignoring technology companies but I consider Bell and Rogers communication companies (I know they deal with technology too).

Rogers, Bell, and Telus pretty much own the communications in Canada, this might change with new competition, but the big three have the competitive advantage and they make life difficult for any newcomers. The big 3 also own the communication infrastructure, again giving them the advantage. In general I think communications will still be around +20 years from now.