As many people search for the best high-yield dividend stocks, the fast-changing tech sector is often the last place they look. But make no mistake; some of the market's most promising dividend stocks hail from the world of technology.
So we asked three top Motley Fool investors to each pick a high-yield tech stock that they believe investors would be wise to consider today. Read on to learn why they chose Verizon Communications (VZ -0.98%), Cisco Systems (CSCO -1.62%), and Seagate Technology (STX).
A juicy yield from a telecom giant
Steve Symington (Verizon Communications): Things were looking up for Verizon shareholders after the company's latest quarterly results exceeded expectations two weeks ago. But the telecommunications leader has all but given up those gains as the broader market pulled back hard over the past few days.
However -- keeping in mind Verizon has increased its dividend for 11 straight years -- patient investors can take solace knowing that its dividend yields around 4.72% annually as of this writing. And its underlying wireless business remains strong, with the company adding an impressive 1.2 million retail postpaid wireless subscribers last quarter. Verizon also achieved healthy postpaid phone churn of 0.77%, demonstrating exceptional customer loyalty and marking its 11th straight period of keeping the metric under 0.9%.
What's more, that loyalty should be cemented with Verizon's planned commercial launch of its next-generation 5G network in 2018. Though to be fair, investors should watch closely to ensure the Trump administration doesn't follow through with potentially disastrous plans to nationalize the wireless industry.
Meanwhile, Verizon is expected to benefit greatly from recent U.S. tax reform initiatives, with management estimating the changes will result in a net increase to cash flow from operations in the range of $3.5 billion to $4.0 billion this year. Add to that the potential for incremental growth from Verizon's Oath media subsidiary -- which generated revenue of $2.2 billion last quarter from dozens of leading media brands including the likes of Yahoo, AOL, TechCrunch, HuffPost, and Engadget, to name only a few -- and Verizon could be a fantastic bet for yield-hungry shareholders looking for a place to put their money to work.
A return to growth
Tim Green (Cisco Systems): Shares of enterprise networking hardware vendor Cisco Systems shot up nearly 27% last year, outpacing the broader market. After two years of slumping quarterly revenue, the company forecast a return to growth in its fiscal second quarter, results for which will be announced on Feb. 14. Cisco's ongoing shift to subscriptions and recurring revenue, while painful in the short term as revenue is pushed out into the future, is finally starting to pay off.
This rise in the stock price has pushed down Cisco's dividend yield, but the stock still offers a yield far higher than the S&P 500. Based on Cisco's latest quarterly dividend payment, shares of the tech company sport a yield of about 2.8%. And Cisco will likely announce a dividend increase in the next month or so, if history is any indication.
Cisco's dividend currently eats up a little less than $6 billion annually, less than half the company's annual free cash flow. Cisco will likely provide an update when it reports its results in February about how the tax bill will affect the company's results. A lower corporate tax rate coupled with the repatriation of foreign cash could lead Cisco to accelerate its dividend growth.
Cisco stock trades for less than 16 times its fiscal 2017 free cash flow. That ratio drops further if you back out the net cash on Cisco's balance sheet. If you want a high-yield tech stock trading for a reasonable price, look no further than Cisco.
Imperfect, inexpensive, with incredible dividends
Anders Bylund (Seagate Technology): The hard-drive manufacturer certainly qualifies as a high-yielder, thanks to a beefy 4.9% dividend yield at current share prices. That torrential cash spigot becomes even more impressive when you consider that Seagate's stock gained 40% in January and 54% over the last six months -- if you bought shares in early August, you'd be looking at an effective yield of 7.5% right now.
The company is not an out-and-out Dividend Aristocrat, but rather an opportunistic booster of dividend check amounts. The quarterly payout has been stuck at $0.63 per share since the fall of 2015, freezing Seagate's dividend and freeing management to put its surplus cash to other use. That being said, the annual payout has increased by 250% over the last seven years.
None of this matters if the company is going down the drain, of course. I have been a skeptic because Seagate is lagging behind nemesis Western Digital (WDC -1.76%) in terms of addressing the rise of solid-state storage devices -- high-speed tools built around memory chips rather than spinning magnetic discs. The company is winning me over in two ways:
- Traditional hard drives seem to have a long-term ticket to ride the enterprise sector. Seagate's sales to large corporations with enormous data storage needs are booming, thanks to the lower cost of large disc-based drives. That trend might even have legs after all.
- Seagate recently signed a long-term supply deal with memory chip maker Toshiba (TOSBF -1.06%), showing that management is considering new ideas.
So you're taking on some risk with this investment, but Seagate's generous dividends just might be worth it.