A Microcap Tech Stock Yielding 7%

Tech stocks are notoriously stingy dividend payers. Typically, these companies use earnings to fuel growth and to keep up with the competition, not to pay shareholders. In fact, the tech-rich Nasdaq Composite Index yields just 0.8% — less than half of what the S&P 500 yields.

There is a small group of tech stocks that do pay nice dividends. These companies aren’t from some obscure corner of the tech world. In fact, they’re software companies whose business models allow them to afford both growth and distributions to shareholders.

In the case of this little company, moreover, shares haven’t fully recovered from the beating they took in 2008, and its earnings are just beginning to. Despite the weaker results, the company hasn’t lowered its dividend, and earnings still support it.

Wayside Technology Group (Nasdaq: WSTG) distributes, sells and markets software from, for example, Intel (Nasdaq: INTC), Quest (Nasdaq: QSFT) and SolarWind’s (NYSE: SWI), to software development and information technology professionals. The $42 million New Jersey-based company has been around since 1982 and has been listed on the Nasdaq since its 1995 initial public offering.

Wayside pays quarterly distributions that have increased +50% since 2003. The current distribution is $0.15 and has been at that level since 2007, giving the company a forward and historical yield of 7.0%. The company’s 2009 earnings of $0.65 per share cover the dividend.

In 2009, Wayside’s net income totaled $2.9 million, down -9.5% from 2008. This was due to a -15.9% drop in sales. Wayside says that the economic downturn was causing current and potential customers to delay or reduce technology purchases, which resulted in longer sales cycles and slower adoption of new technologies.

But there’s a silver lining. Fourth-quarter 2009 sales topped the same period in 2008, increasing +6%. This was the first time quarter-over-quarter sales rose in 2009.

In addition to help from the economy, Wayside’s management plans to grow the business by investing in information technology and marketing, and expanding its sales team and software offerings.

The company should have no problems finding the capital to implement its strategy. Wayside has a solid balance sheet. It has no debt, $3.44 in cash per share, and a book value of $5.20 per share.

The company’s shares have underperformed the market during the past year, setting the stage for a possible comeback. While the S&P has gained +55% during the past twelve months, Wayside has only gained +32%. But since the beginning of the year, it’s begun to outperform, returning +10% since January 1st, compared with the S&P 500’s +4%.

Despite these recent gains, the shares are still undervalued — perhaps because no one follows this company. Wayside’s current dividend yield of 7.0% is not only about +15% higher than its five-year average, but also more than +300% higher than the S&P 500’s current average yield of 1.8. Its price-to-earnings ratio (P/E) of 13.5 is -35% lower than the S&P 500’s average P/E of 21 and -20% lower than its five-year average P/E of 17.

One caveat: Wayside is a small company whose shares are thinly traded, which could lead to volatility. The company’s average daily volume is just 6,000 shares — Microsoft (Nasdaq: MSFT), by contrast, trades about 50 million shares daily. But if you’re in the market for a small-cap dividend payer with upside potential, then you should consider this high-yielding tech stock.

P.S. If you’re looking for both high yields and enormous capital gains, then you need to learn more about our “Income Security of the Month” for March 2010. With a strong history of paying increasing dividends, this stock is currently yielding an eye-popping 10.2%. That’s double the 10-year Treasury yield, nearly three times what “AAA”-rated corporate bonds pay you and five times what you get from the S&P 500!