Cisco: New Higher Dividend Yield Levels To Watch

At first I thought it was a typo when I saw that Cisco (CSCO) was planning to raise its dividend by 75%. But it's true. Cisco will pay a 14-cent dividend beginning this October, up 75% from the 8-cent current payment.

Dividend stocks often trade based on certain yield levels. While Cisco has only paid a dividend for the past six quarters, its dividend yield has ranged from around 1% to 2%.

Here's a chart showing the stock, how it has traded against previous yield levels, and new dividend levels to watch.

Even if the stock trades up to $20, it will still have a market yield of 2.8%. The 1.50% level would be at $37.33.

More dividend increases on the way?

Cisco's ten-year high is near $33. I don't think the stock is going to move into the 30s in the next few weeks or months, but I do think the stock runs much higher given the company's commitment to its shareholders. As the release stated:

"Cisco has the financial strength and flexibility to effectively invest in our business, pursue strategic opportunities, such as acquisitions, as well as return a minimum of 50% of our free cash flow annually through dividends and share repurchases to our shareholders," said Frank Calderoni, EVP and Chief Financial Officer. "Our financial strength gives us the confidence to commit and execute against this strategy, in order to provide meaningful return to our shareholders."

And as Cisco CEO John Chambers told CNBC, "we were very comfortable in our ability to pay that (dividend) even without repatriation."

Chambers said he thought Asian economies were doing "okay," Europe was "a bit challenged," and that the US economy was seeing improvements:

"In the U.S., we started to see especially in the second half of the quarter, very slight improvement in enterprise, very slight improvement in the commercial marketplace. We've seen state and local government come back. Federal government is going to be tough for the next couple of quarters."

Finally, here's a look at how the stock has traded various against PE levels (based on trailing 12-month earnings) over the past couple of years.

While Cisco has a long way to go to become a dividend "aristocrat" or even a "champion," I'm long the stock and am glad the company delivered a significant dividend increase this quarter.

Disclosure: I am long CSCO.