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3 Cheap, High-Yield Tech Stocks to Buy

By Keith Noonan - Oct 2, 2017 at 4:21PM

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These three tech companies appear to be undervalued, and they'll also pay you to own them.

The technology industry hasn't historically been a great place to turn to if you were looking for stocks that provided high yields and dependable dividend growth, but that's changed over the years. There's now an appealing selection of stocks in the sector that offer the rare combination of sizable dividends, low valuations, and long-term growth prospects -- and income investors who avoid the tech sector could wind up missing out big time.

Read on to see why Cisco Systems (CSCO -0.56%), Qualcomm (QCOM -1.91%), and IBM (IBM 0.34%) are top dividend-paying tech stocks to buy today.

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Image source: Getty Images.

Big Blue is down but not out

IBM is going through a transitional period, and that's come with growing pains that are evident in its performance. For one, overall revenues haven't been growing at all, with 21 quarters of consecutive year-over-year sales declines and revenues at their lowest point in 15 years. This trend has caused the company's stock to drop roughly 30% over the last five years, lagging the S&P 500 index's 72% gain over the stretch.

The good news for investors is that IBM now looks to be an appealing value play, and it's possible to buy into its turnaround story on the cheap. The company is priced at less than 11 times forward earnings estimates and offers one of the best dividends in the tech sector -- with a 4.1% yield and a 22-year history of delivering annual payout growth.

Those attractive characteristics alone wouldn't make IBM stock worth owning if the company were on an irreversible downtrend, but there are reasons to think that's not the case. IBM's "strategic imperatives" businesses are growing at a solid clip and now constitute roughly 43% of sales, the company is performing well in the fast-growing cloud services space, and it has an early leadership position in technologies like artificial intelligence and blockchain. The company's share buyback initiative should also lend earnings and dividend momentum down the line and help put a floor on its stock price.

A networking giant switching to service

Cisco is another company undergoing a transformation that income-seeking investors should consider adding to their portfolios. The networking giant has a forward P/E of roughly 13 and a great balance sheet -- with roughly $35 billion in cash and investments net of debt. Shares have gained roughly 8% this year. 

Putting its valuation in context, Cisco has been seeing low growth due to soft demand for its routers and switches -- and recently revised expectations for annual revenue growth between 3% and 6% over the next three to five years to growth between 1% and 3%. The company's long-term outlook is more promising than its recent growth rates and disappointing guidance suggest, however. The company is building its subscription-based revenue streams and making acquisitions to diversify its business and shore up its leadership position in the networking and communications industry. These initiatives stand a good chance of paying off over the long term and positioning the company to continue returning value to shareholders.

Cisco first began paying a dividend in 2011, so it doesn't have a long history of growth to preserve, but it has been aggressive in raising its payout and signs point to substantial payout increases down the line. The company has increased its annual disbursement for six years running, boosting its payout 383% over the stretch, and management is committed to returning at least half of free cash flow to investors through dividends and buybacks. Payout growth has slowed recently, with its most recent raise coming in at 11.5%, but that's still a solid increase, and today's 3.5% yield is a good base to build from.

This chip leader is worth the risk

As the leader in mobile-connectivity chips and processors, Qualcomm's technology is on track to play a central role in the evolution of tech hardware. That hasn't stopped its stock from taking a beating in 2017, however. The company has suffered setbacks stemming from increasing tensions and lawsuits with important customers, most notably Apple, and the Chinese and South Korean governments have also taken aim at the company's licensing business. These combined pressures have contributed to a 20% valuation decline year to date.

With shares in the neighborhood of 52-week lows, the company trades at roughly 12 times forward earnings and packs a 4.2% yield. It's also raised its annually payout for 14 years running. Those are characteristics that are likely to appeal to risk-tolerant investors seeking an income play that also has room for big capital appreciation -- and it's not as if the chipmaker doesn't have credible avenues to a major rebound.

The company is on track to acquire NXP Semiconductors, a move that will make Qualcomm by far the biggest player in the automotive-chips market and dramatically improve its already-strong position in the Internet of Things market. Qualcomm could continue to languish if it runs into more regulatory trouble and issues with key customers or if the NXP deal doesn't go through, but the trade-off is that shares could pop if conditions improve and investors who buy today would get the benefit of a great dividend that's likely to improve with time. 

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Stocks Mentioned

International Business Machines Corporation Stock Quote
International Business Machines Corporation
$141.19 (0.34%) $0.48
QUALCOMM Incorporated Stock Quote
QUALCOMM Incorporated
$127.74 (-1.91%) $-2.49
Cisco Systems, Inc. Stock Quote
Cisco Systems, Inc.
$42.64 (-0.56%) $0.24
Apple Inc. Stock Quote
Apple Inc.
$136.72 (-1.80%) $-2.51
NXP Semiconductors N.V. Stock Quote
NXP Semiconductors N.V.
$148.03 (-1.33%) $-1.99

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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