Paying sizable dividends used to be uncommon in the tech sector, but many big technology and telecom companies are increasingly funneling earnings back to shareholders. And while tech stocks might rightly be seen as carrying greater risk than those in the high-yield utilities, materials, and financials sectors, they can also offer a rare combination of growth potential and income generation.
In search of tech stocks with strong outlooks and substantial dividend payouts, we asked three of our writers to pick companies with yields higher than 3% that deserve a spot in your portfolio. The companies which made the list: IBM (NYSE:IBM), Cisco Systems (NASDAQ:CSCO), and Qualcomm (NASDAQ:QCOM).
Tim Brugger: Despite the relative negativity from analysts, IBM stock has been on a nice run of late. The pundits have a consensus price target of just $160 a share, though investors have clearly gotten onboard with CEO Ginni Rometty's plans to dominate fast-growing markets, including the cloud and Internet of Things (IoT), as part of IBM's "strategic imperatives" efforts.
At its current $163 a share range, some investors may think it's too late to enjoy any growth along with IBM's nearly 3.5% dividend yield. But as Rometty and team demonstrated again last quarter, IBM is gaining even more momentum where it counts: cloud-based Software-as-a-Service (SaaS) and business process sales. Of the $204 billion the public cloud is projected to generate in 2016, over $42 billion will come from business process services and another $37.7 billion from SaaS, both right up IBM's alley.
Last quarter IBM's combined strategic imperative sales -- cloud, IoT, security, analytics, and mobile -- climbed 12% year over year to $8.3 billion,and now account for 38% of total revenue. Cloud sales in particular impressed in the second quarter, climbing a combined 30% -- led by a whopping 50% improvement in SaaS revenue -- to $6.7 billion. And investors have taken notice, bumping IBM's share price up 18% year-to-date, yet it's still trading at just 11 times future earnings.
Toss in a 3.45% dividend yield on top of its multiple growth opportunities and relative value, and IBM warrants a spot on most any list of high-yielding tech stocks to buy.
Chuck Saletta: Cisco Systems may have been one of the poster companies of the dot-com implosion, but today's Cisco has been transformed into a dividend dynamo. These days, the networking giant does an incredible job rewarding its shareholders while building its business and maintaining its position as the worldwide leader in connecting systems together.
Cisco sports a dividend yield around 3.5%, while still paying out less than half its earnings as dividends. It has increased its dividend every year since it launched the payment in 2011, and with an expected annual earnings growth rate above 10% for the next several years, it has room to continue that trend.
It's tough to find a market leader with such a great combination of a strong dividend for its shareholders today and a clear runway toward potential future dividend growth. With today's Cisco Systems, though, that's exactly what you get.
Keith Noonan: Investor confidence in Qualcomm has wavered over the last year due to slowing mobile growth, but the stock offers an excellent dividend and a reasonable valuation that make it a strong portfolio candidate. Qualcomm's payout yields roughly 3.5% -- well above the roughly 2% average yield of dividend-paying stocks on the S&P 500. The chip giant has delivered roughly 147% dividend growth over the last five years and raised its dividend annually for the last 13 years.
Qualcomm's leading position in mobile designs has made it cash-flow rich, with the company generating roughly $6.4 billion in free cash flow over the trailing twelve-month period, and a reasonable payout ratio at approximately 56% of earnings suggests the company has room to continue payout growth.
The maturation of the mobile market and decreased pricing strength represent an ongoing concerns, but investment in other areas including the Internet of Things should aid the company in coming years. Last fiscal year already saw the company's IoT segment generate more than $1 billion in revenue, and a study from LexInnova indicates that Qualcomm is at the head of the Internet of Things pack in both total patents and high-value patents. The company's leading position in mobile chips might also help it win contracts for IoT devices.
While the S&P 500 index has gained roughly 80% over the last five years, Qualcomm's price has increased just around 20%, indicating a potential buying opportunity. With the stock trading at roughly 16 times forward earnings, Qualcomm is a good company at a fair price, and its substantial dividend sweetens the pot.
Chuck Saletta owns shares of Cisco Systems and IBM. Keith Noonan has no position in any stocks mentioned. Tim Brugger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Qualcomm. The Motley Fool recommends Cisco Systems.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.