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2 Smart Dividend Picks for Your Retirement Portfolio

Saturday - 6/22/2013, 2:55pm  ET

Dividend stocks hold a prime position in any retirement portfolio as these stocks can provide you with a steady stream of income. There are several ways to go about picking dividend stocks and the foremost method is to select stocks with high dividend yields.

However, relying solely upon one metric is not advisable, as a stock may have a high dividend yield merely because of falling market price. Apart from this, I also look at the dividend payout ratio of the stock as it helps me determine whether the company is likely to maintain or improve its dividend performance in the future.

As a rule of thumb, a lower dividend payout ratio offers a company more room. Also, I take dividend growth rate into factor, which provides an extra check that the company is likely to continue with its current dividend payment policy. 

So, here are my top two dividend picks which deserve to be in every retirement portfolio

Seagate Technology has an impressive dividend yield of 3.42%. Another attractive point about the stock is low dividend payout ratio of 21%, which signals that the company has plenty of room to further increase its dividend.

The company deals in HDDs and SSDs and is currently going through a tumultuous period, owing to declining demand of local storage devices in the post-PC era. 

The company announced 21% decline in revenue for its latest quarter, which was mainly due to deterioration of Average Selling Price of storage devices as the supply side picked up after a period of production slump due to floods in Southeast Asia. The stock is still trading at very attractive P/E ratio of just over 7.

Cloudy outlook

Seagate faces direct threat from the emerging cloud storage trend. Cloud computing is still in the nascent stage but it is all set to grow exponentially in the near future and every new iteration of cloud computing will act as a nail in the coffin of local storage devices. Seagate is justified in fearing the trend.

Seagate is also participating in the trend as it recently infused funds in a cloud-centric startup, Cloudscaling. The company collaborated with Juniper to contribute $10 million to the startup firm. Cloudscaling uses OpenStack cloud platform and mainly targets enterprise segment. It currently counts LivingSocial and Ubisoft among its clients.

Stiff competition

Seagate faces tough competition from various companies including Western Digital , which is consistently augmenting its position in the SSD and hybrid segment. The company recently collaborated with SanDisk for launching a new hybrid disk drive and is likely to poach market share from Seagate.

It is also planning to launch a thin form hybrid drive with mere 2.5 inch thickness. However, Seagate also recently introduced its retail user oriented SSD 600 and SSD 600 Pro and seems ready to face Western Digital’s challenge.

Bottom line

Despite the worries about its long term future, Seagate is a good dividend investment candidate. Apart from impressive valuation, it also boasts of solid margins. The company has been consistently boosting its gross margin and is likely to keep up the trend. Seagate also has a dominant position in the SSD segment, so while the HDD segment faces decline in demand, the company is in a position to counter the effects.

As for the advent of cloud, while it may temper consumer level HDD demand in the short run, but eventually, the data needs to be stored somewhere, which would be enterprise centric HDDs. Seagate, in this situation, is destined to remain an attractive investment option as it works towards augmenting its position in the enterprise HDD segment and the SSD segment.

Chipzilla is here

Intel  is another worthy contender for a place in an income portfolio. Rumors about the impending demise of the company have been abound for quite some time now. However, contrary to those rumors, the semiconductor behemoth is on its way to innovate and succeed. There are plenty of concerns about the company’s future, especially industry experts are skeptical about its ability to maintain the momentum in the post-PC era.

Declining PC demand

Ever since the advent of smartphones and tablets, PCs are consistently losing ground as go-to computing devices. Despite numerous attempts, Intel has not been able to make a patch in the mobile computing segment, where ARM Holdings clearly leads the pack. It is imperative for the company to innovate to gain hold in this emerging segment. Recently, it received a well deserved boost as Samsung chose Intel chips to power its new Galaxy Tab 3.

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