The tech sector is often associated with risk and volatility. This may lead some income investors to make most of their stock picks elsewhere; after all, stable dividend stocks in tech aren't exactly commonplace. But despite much of the tech sector's disdain for regular, meaningful dividends, there are still some dividend stocks in tech that are considered relatively safe.
If you're looking for a safe dividend stock in tech, look no further than market leaders Cisco (NASDAQ:CSCO) and IBM (NYSE:IBM). Both companies have steadily increased their dividends for years -- and both look poised to continue increasing their dividends in the future.
As an industry leader with significant brand equity and scale, Cisco boasts a dominant position in enterprise network equipment and is aggressively pursuing opportunities in cloud- and software-based networking. As its customers add billions of new connections to their businesses in the coming years amid the rise of the Internet of Things, Cisco is positioned to benefit.
Cisco's strong business is evident in its recent results. Fiscal 2017 third-quarter non-GAAP earnings per share increased 5% year over year, demonstrating the company's continued execution on its multi-year transformation as cloud and software become more integral than ever to networks.
Cisco's dividend payments are backed by significant free cash flow, making the company's 3.7% dividend yield sustainable. Of the $12.7 billion in free cash flow Cisco generated in the trailing 12 months, it paid out just $5.4 billion in dividends. Further highlighting how sustainable Cisco's dividend is, the company's payout ratio is just 44%.
Like Cisco, IBM is also a dominating player in its core market: enterprise information technology (IT). The company's deep bench of quality, mission-critical services and platforms keep its large base of customers deeply entrenched in its offerings, creating high switching costs.
IBM's non-GAAP EPS increased only 1% year over year in the company's second quarter. However, IBM's strategic imperatives and cloud segments, which management herald as its most important initiatives for the future, could help IBM return to growth over the long haul. These two segments saw revenue increase 5% and 15% year over year in IBM's second quarter, respectively. Of IBM's $19.3 billion of third-quarter revenue, strategic imperatives and cloud represented a substantial $8.8 billion and $3.9 billion, respectively.
The company is a cash-generating machine. Free cash flow in the trailing 12 months was $11.7 billion, yet IBM only had to pay out $5.4 billion of this free cash flow in dividends to achieve its fat 4.2% dividend yield at today's stock price. In addition, IBM's payout ratio is notably low at just 47%.
The bottom line
Helping solidify both companies as some of the safest dividend stocks in tech, each stock boasts a conservative price-to-earnings ratio -- a rare find among market leaders in tech lately. Cisco and IBM's price-to-earnings ratios are 16.2 and 11.2, respectively. Though Cisco's price-to-earnings ratio is higher than IBM's, Cisco's stronger EPS growth recently easily justifies its slight premium to IBM. Furthermore, though Cisco's price-to-earnings ratio is higher than IBM's, it's notably well below the 24.6 average P/E of stocks in the S&P 500.
For investors looking for stable dividend income from tech, Cisco and IBM both look promising.