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4 Tech Stocks to Buy with Dividends Yielding More than 3%

By Leo Sun - Apr 2, 2017 at 11:07AM

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Cisco, IBM, HP, and Qualcomm all offer above average yields with below average valuations.

With the S&P 500 hovering near a historic high, the index's average dividend yield has dipped below 2%. Meanwhile, low interest rates and global uncertainties caused many income investors to buy blue chip dividend stocks, which boosted their valuations and lowered their yields.

Those factors turned many well-known income stocks into shaky investments. However, four stocks with solid yields over 3% and below-average valuations could still be good income plays at their current prices -- Cisco (CSCO), IBM (IBM), HP (HPQ), and Qualcomm (QCOM).

A businessman plants a "money tree."

Image source: Getty Images.

Cisco Systems

Cisco is one of the largest networking hardware companies in the world. Its core business of switches and routers is a slow growth one, but the company has been investing heavily in higher growth businesses like collaboration software, wireless products, and cybersecurity services.

On the surface, its growth looks glacial, with analysts expecting revenue to fall 2% this year and earnings to grow less than 1%. However, Cisco has plenty of free cash flow ($12.3 billion over the past 12 months) to keep making strategic acquisitions, buying back stock, and paying dividends. Cisco currently pays a forward dividend yield of 3.4%, which is supported by a payout ratio of 54%. It's raised that dividend annually for six straight years. The stock trades at 18 times earnings, which is lower than its industry average of 25.

IBM

IBM is a much leaner company today than it was in previous years. The company sold its PC business and x86 server businesses to Lenovo, paid Globalfoundries to take its chipmaking business, divested other slower-growth businesses, and slashed thousands of jobs. To spur growth again, it invested heavily in its five higher-growth "strategic imperatives" -- cloud, mobile, social, analytics, and security.

IBM CEO Ginni Rometty speaks about Watson.

IBM CEO Ginni Rometty. Image source: IBM.

Like Cisco, IBM is trying to grow those businesses fast enough to offset ongoing declines at its slower growth hardware, software, and IT services units. That hasn't worked so far -- analysts expect Big Blue's revenue to fall 2% this year, but its earnings (lifted by lower expenses and buybacks) could grow 2%. IBM currently pays a forward yield of 3.2%, which is supported by a payout ratio of 44%. That dividend has been raised annually for 17 straight years. The stock trades at 14 times earnings, which is lower than its industry average of 21.

Hewlett-Packard

Hewlett-Packard also slimmed down in late 2015 by splitting with Hewlett-Packard Enterprise. HP retained the company's PC, printing, and imaging businesses, and HPE kept the enterprise hardware and software ones.

HP's PC and printing markets have both been slow-growth ones, but its PC sales rebounded sharply last quarter as higher-end laptops, 2-in-1s, and convertible devices offset flat sales of desktops. Printer sales still dipped year-over-year, but new initiatives like mobile printers, industrial 3D printers, and its takeover of Samsung's printing business could all get the business back on track.

Analysts expect HP's revenue and earnings to each rise less than 1% this year, but the stock remains cheap at 12 times earnings -- which is lower than its industry average of 13. It pays a forward yield of 3.1%, which is supported by a payout ratio of 33%.

Qualcomm

Qualcomm is the biggest mobile chipmaker in the world. It generates most of its revenue from mobile chip sales, but most of its profits come from its high-margin patent licensing business for 3G/4G wireless technologies. Both business units face tough headwinds -- cheaper ARM-based chipmakers and first-party chipmakers are denting its chipmaking revenues, while defiant OEMs and regulators want Qualcomm to lower its licensing fees.

A cutaway for a mobile phone revealing a Snapdragon processor inside.

Image source: Qualcomm.

Despite those challenges, Wall Street expects Qualcomm's revenue and earnings to respectively rise 1% and 5% this year, fueled by sales of new Snapdragon chips and its investments in adjacent markets.

Its planned acquisition of NXP Semiconductors, which still needs to clear regulatory approval, would boost its annual revenues by nearly 40% and make it the biggest automotive chipmaker in the world.

Qualcomm pays a forward yield of 3.7%, has a payout ratio of 63%, and has raised that dividend annually for 14 straight years. The stock trades at 17 times earnings, which is lower than its industry average of 22.

The key takeaways

Cisco, IBM, HP, and Qualcomm all pay solid dividends and trade at discounts to their industry peers. That makes them good income picks, but investors should realize that their upside potential could be limited by the near-term headwinds.

Cisco and IBM are both trying to grow newer businesses fast enough to offset slowdowns at their older ones. HP is pivoting its PC business away from desktops while diversifying and scaling up its printing unit. Qualcomm is trying to diversify its chipmaking business away from mobile devices, defend its licensing practices against regulators, and close the NXP deal. This means that all four companies will keep paying dependable dividends, but investors shouldn't expect their stocks to rally sharply anytime soon.

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Stocks Mentioned

International Business Machines Corporation Stock Quote
International Business Machines Corporation
IBM
HP Inc. Stock Quote
HP Inc.
HPQ
Cisco Systems, Inc. Stock Quote
Cisco Systems, Inc.
CSCO
QUALCOMM Incorporated Stock Quote
QUALCOMM Incorporated
QCOM
NXP Semiconductors N.V. Stock Quote
NXP Semiconductors N.V.
NXPI
Lenovo Group Stock Quote
Lenovo Group
LNVGY
Hewlett Packard Enterprise Company Stock Quote
Hewlett Packard Enterprise Company
HPE

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