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3 High-Yield Tech Stocks

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The tech sector used to be a barren wasteland for income investors. That's not true anymore, as these three high-yield tech giants show.

High-technology and exciting growth stocks go hand in hand. That's the traditional theory, at least -- those newfangled tech stocks can't be good for traditional investment strategies like deep-discount value and income-generating dividends, right?

Actually, that's old hat. Plenty of big-name technology companies pay generous dividends these days, making them natural picks for income investors.

We asked a handful of your fellow investors here at The Motley Fool to come up with a few examples of this. Read on to see why dividend investors should look into Cisco Systems (CSCO 0.06%)International Business Machines (IBM 0.72%), and Corning (GLW -1.90%) right now.

Piles of gold coins stacked atop a calendar.

Image source: Getty Images.

Working through a transformation

Tim Green (Cisco Systems): Nearly every major technology company is going through some sort of transformation, forced to adapt to a changing technological landscape. Cisco Systems, the dominant provider of networking switches and routers, has remained dominant despite the rise of cloud computing and software-defined networking. But the company isn't sitting still. Instead, it's pushing into fast-growing areas like security and introducing new hardware that utilizes machine learning.

Cisco's profits have mostly held up even as the company invests in its growth businesses. Cisco reported adjusted earnings per share of $2.39 in fiscal 2017, up slightly from the previous year. Based on the current quarterly dividend of $0.29 per share and that adjusted earnings figure, Cisco's payout ratio sits at 48.5%. With a dividend yield of 3.4%, even modest dividend growth makes Cisco an attractive dividend stock.

One thing hurting Cisco's results is its ongoing shift to subscription software and services. This shift is knocking down Cisco's top-line growth by as much as 2 percentage points, as revenue recognition gets spread out into the future. This is hitting the bottom line as well, and it may be a while before the negative impact dissipates.

For long-term dividend investors, there's a lot to like, even with near-term headwinds stunting earnings growth. Dividend growth may not be all that quick in the next few years, but a solid dividend yield well above that of the S&P 500 makes Cisco a solid high-yield tech stock for your portfolio.

IBM is simply becoming a different kind of eternal giant

Anders Bylund (IBM): Big Blue is changing, and the transformation hurts. The technology giant has been shedding hardware operations in recent years in an effort to refocus on artificial intelligence, mobile software, and cloud computing.

The strategy shift has caused IBM's annual revenue to decline by 24% over the last five years while free cash flow fell by 22% and adjusted earnings per share took a 10% haircut. As a result, share prices dropped by 31% -- and dividend yields soared from 1.5% to 4.1%.

My personal retirement portfolio holds a few IBM shares. They aren't there for their divident heft, but for the nigh-on inevitable return to market-beating health as the new strategic direction plays out. I'm still convinced that IBM will overcome its transformation pains and get back to healthy long-term growth again, though it's unclear exactly when the recovery will become obvious.

So far, cloud computing revenue has developed into a $15 billion annual business that accounts for 20% of Big Blue's total sales. The so-called strategic imperatives as a group deliver 43% of IBM's annual sales and are growing at an annual rate of 12% while top-line revenue is trending downward overall.

IBM's management is firmly committed to returning value to shareholders. Out of $11.7 billion in trailing free cash flow, the company spent $5.4 billion on dividend checks and another $4.3 billion on share buybacks, returning cash directly to shareholders in two different ways. And the long-term dividend trend is one of unstoppable annual growth:

IBM Dividend Chart

IBM Dividend data by YCharts.

This is both a deep-discount value play and a fantastic dividend payer today, and I intend to own IBM shares for the long haul. Maybe you should, too.

A high-yield tech giant in disguise

Steve Symington (Corning): With Corning's healthy dividend yielding around 2% annually at today's prices, I wouldn't blame you for balking at my decision to single out the glass technologist as a promising "high-yield" tech stock to buy now. But I think Corning fits the mold given both its history of increasing its dividend and its ambitious plans to continue returning capital to shareholders in the coming years.

For perspective, Corning most recently boosted its quarterly dividend by 14.8% early this year, to $0.155 per share (or $0.62 annually). But as I pointed out at the time, CEO Wendell Weeks reminded investors that the company has set a goal of increasing its dividend at least 10% annually through 2019. That means Corning investors will collect dividends totaling at least $0.75 per share at that time, which would mean a yield at today's cost basis of at least 2.5%.

What's more, those dividend increases are part of a broader strategic capital allocation framework put into place by Corning in late 2015, under which the company set a goal of returning over $12.5 billion to shareholders through dividends and share repurchases. Having already returned $7.4 billion since then as of last quarter -- when it beat expectations thanks to the outperformance of its optical and specialty materials segments -- Corning is on track to easily meet that goal.

So, even with Corning shares up around 25% so far in 2017, I still think dividend-seeking investors would do well to open or add to their positions today.

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Stocks Mentioned

International Business Machines Corporation Stock Quote
International Business Machines Corporation
IBM
$141.72 (0.72%) $1.01
Cisco Systems, Inc. Stock Quote
Cisco Systems, Inc.
CSCO
$42.91 (0.06%) $0.03
Corning Incorporated Stock Quote
Corning Incorporated
GLW
$31.77 (-1.90%) $0.61

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

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