When you think of technology stocks, a high-yield dividend is probably not the first thing that comes to mind. Many tech stocks are firmly in the “growth-stock” camp, and dividends are either non-existent or token, at best.
But there are plenty of tech stocks that also pay generous dividends. Three of our Motley Fool investors have identified International Business Machines (NYSE:IBM), Iron Mountain (NYSE:IRM), and Cisco Systems(NASDAQ:CSCO) as high-yield tech stocks that dividend investors should consider. Read on to find out why.
Big Blue’s big dividend
Danny Vena(IBM): If you’re looking for high yield in the tech sector, look no further than stalwart IBM. The computing giant currently has one of the larger payouts among technology companies, with a juicy 4% yield, and has been paying dividends consistently for over a century. It also sports a healthy payout ratio of just 47%, so the company has ample room to continue raising its dividend in the future.
That isn’t the only way that Big Blue has been returning capital to shareholders. Over the last four quarters, the company has matched the $5.7 billion in dividends with another $4.3 billion in share repurchases. IBM can afford to be generous, as it generated over $11 billion in free cash flow over the last 12 months.
These paybacks aren’t an isolated incident, either: The company has reduced its share count by a whopping 18% over the last five years. IBM raised its dividend by 7.1% this year after a slightly higher 7.7% increase in 2016. Still, these consistent raises add up over time. Over the last five years alone, the dividend has increased a hardy 76%.
Many investors have been apprehensive about the pace of IBM’s shift from its legacy business to its aptly named strategic imperatives, which include artificial intelligence and cloud computing. Over the trailing 12 months, these newer business lines accounted for 43% of IBM’s revenue, so the company is making progress. But investor fears still have resulted in the stock trading at a bargain-basement discount, currently at only 12 times trailing earnings and only 10.5 times its forward multiple. Patient investors can be paid well to wait for the turnaround to gain traction.
Rich Duprey (Iron Mountain): Iron Mountain might not be a company that immediately springs to mind as a “tech stock,” but in addition to the hundreds of millions of cubic footage of space devoted to storing hard copies of records for its 230,000 business customers — including 95% of all Fortune 1000 companies — the records and data-storage specialist, which is structured as a real estate investment trust (REIT), also safeguards 89 million separate pieces of media and scans more than 1.2 billion images annually.
Over the past few years, Iron Mountain has grown revenue at a better-than-8% annualized clip, and estimates it will be able to achieve a similar rate for its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Importantly, for income-seeking investors, the company expects to grow its dividend by more than 4% each year.
Currently, Iron Mountain’s payout of $2.20 annually yields 5.9% based on its current stock price. Chasing yield is often a very risky strategy, and many companies paying such elevated distributions are troubled. However, because this is a REIT, and the payout represents around 80% of the company’s expected adjusted earnings from operations, it’s not exorbitant. In fact, REIT payouts of 85% to 90% of adjusted funds from operation (AFFO) are considered safe and sustainable.
Income investors seeking a high-yielding tech stock may want to start scaling Iron Mountain.
Hardware giant today, software giant tomorrow
Tim Green (Cisco Systems): Networking-hardware giant Cisco Systems is in a similar position as many legacy tech giants, facing down myriad threats to its lucrative business model. With potential disruptions abounding, Cisco has put an emphasis on growing its software and services businesses. Transitioning from a seller of boxes to a seller of solutions is the order of the day.
Cisco expects its growth to be slow over the next few years thanks to its software and services push. Software subscriptions spread out revenue over time, which will put near-term pressure on Cisco’s top line. The company sees revenue growing by just 1% to 3% annually, down from a previous outlook of 3% to 6% annual growth.
For dividend investors, there’s a lot to like despite the lackluster outlook. Cisco stock yields about 3.5%, and less than half of earnings went toward dividends in fiscal 2016. Even sluggish earnings growth can yield solid dividend growth, and share buybacks will help the cause by lowering the outstanding share count. Cisco’s valuation is also on the cheaper side, with the stock trading for just 13.4 times the average analyst estimate for fiscal 2017 adjusted earnings.
Cisco is a far cry from the growth stock it once was. But for investors looking for a solid value and nice dividend, Cisco is an excellent choice.