If you're on the hunt for stocks that offer hefty dividends and market-beating growth prospects, there's no better place to look than the technology sector. That's a relatively recent development and one that might surprise some investors.
Dividend-paying tech stocks used to be something of a rarity, but there's no longer a shortage of companies in the sector that offer sizable payouts. In many cases, these companies have turned to dividends in order to compensate for slowing growth or difficult transitional periods. However, some of these businesses will be able to bounce back and better tap in to tech sector momentum -- paving the way for a combination of capital appreciation and income generation. With that in mind, here's why IBM (IBM 1.44%), Cisco Systems (CSCO 2.94%), and Seagate Technology (STX +0.00%) are top dividend plays in the tech sector.
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IBM
IBM stock has lagged the broader market over the last five years as declining demand for its legacy hardware and services has weighed on the business, but there are signs that the company's turnaround is making progress.
Big Blue's most recent earnings report snapped a 22-quarter streak of consecutive revenue declines, delivering currency-adjusted sales growth of 1%. That's far from the roaring momentum growth many investors are looking for, but it could signal an important turning point for the company.
IBM's strategic imperatives segment, which includes growth business like cognitive computing, security, and mobile, saw its revenues increase 14% to reach 46% of total sales last quarter. The December-ended fiscal year also saw the company record $17 billion in cloud revenue (up 24% year over year) and notch an 18% increase in as-a-service revenue to reach $10.3 billion. That's evidence of solid demand for cloud services that should continue aiding the company's transformation effort. The turnaround remains an ongoing process, but patient investors have an opportunity to buy IBM's long-term potential at a discount and enjoy sizable returned income along the way.
Shares yield roughly 3.8% at current prices, and investors can be reasonably certain that the company's payout will continue to increase with time. IBM has raised its disbursement annually for 22 years running, and with the cost of distributing its payout representing just 42% of trailing free cash flow (FCF), there's room to boost its payout even if the business enters a slow cycle.
Big Blue is also in the middle of a share repurchasing initiative. Between its dividend and buybacks, the company returned roughly three quarters of its $13 billion 2017 free cash flow to shareholders, and it will likely continue adding to its commendable history of returning value to investors.
Priced at roughly 11 times forward earnings estimates, IBM stands out as a worthwhile play for long-term investors looking for dividend-paying stocks in the tech sector.
Cisco Systems
Even after gaining roughly 30% over the last year, Cisco stock remains an attractive investment for those seeking income-generating tech stocks. Shares are valued at a reasonable 17 times forward earnings, offer a dividend yield of roughly 2.8%, and have long-term upside as the networking giant hones its business to better meet the demands of a shifting industry landscape.
Like IBM, Cisco is looking to move away from a hardware-dependent business model in favor of a software-focused strategy. Prioritizing subscription revenues has meant sales declines in recent quarters, but the upside is that the transition will produce dependable recurring revenue down the line. As of the company's October-ended quarter, 32% of the sales were generated from subscriptions -- up from 29% in the prior-year period, and deferred revenue actually increased 10%.
As the number of networked devices continues to expand thanks to connected cars, smart cities, and other Internet of Things technologies, Cisco's expertise in the hardware and software sides of connectivity could open up avenues to sustainable growth.
There's already some evidence of momentum on this front, with revenue for its security business increasing 8% year over year last quarter, and deferred revenues for the category up 42% compared to the prior-year period. Security software still makes up a small portion of Cisco's sales (roughly 5% in the last quarter), but there are indications that it could solidify as a sales driver that also increases the appeal of the company's switch and router hardware.
Returning to the income side of things, Cisco is a cash-flow machine -- with roughly $13.4 billion in free cash flow over the trailing-12-month period, and the cost of distributing its current dividend coming in at just 45% of FCF over the stretch. Cisco has a very solid balance sheet as well, with somewhere in the neighborhood of $36 billion in cash and short-term assets net of debt.
Based on management's comments, the company will likely use recent cuts to the U.S. corporate and repatriation tax rates as an occasion to deliver substantial dividend growth and make acquisitions that accelerate its push into software -- developments that could have a big long-term payoff for shareholders.
Image source: Getty Images.
Seagate Technology
Seagate Technology is a company at the center of conflicting product trends in the digital storage industry. As more file storage migrates to the cloud, conventional wisdom has held that Seagate's business will be negatively impacted. Until relatively recently, that's translated to soggy stock performance, and shares are still down roughly 13% over the last three years, but the company appears to be turning a corner. To be sure, the rise of cloud storage will have a negative impact on the need for storage in consumer devices like laptops and tablets, but that's only part of the picture.
The good news is that Seagate still sees a big opportunity in providing storage for the data centers at the heart of the cloud computing and storage revolutions, and a move away from smaller-capacity hard drives is creating sales and margin momentum. The company is also finding success in reducing business costs, with operating expenses down 15% year over year last quarter to reach $390 million. Looking ahead, management expects to have reduced non-GAAP quarterly operating expenses to $375 million by the end of its current fiscal year.
Even after climbing more than 50% over the last six months, Seagate is reasonably priced at roughly 10.5 times forward earnings estimates and sports a 4.9% dividend yield. The company hasn't raised its dividend since 2015, and investors probably shouldn't expect a payout increase in the near future based on management's comments in the company's most recent earnings call. That said, the stock already offers a hefty yield, and the company seems to be in good shape to maintain its current payout levels -- with the cost of distributing its current dividend coming in at just 55% of trailing free cash flow and momentum that suggests its payout is in little danger of being cut. The December-ended quarter saw the company's FCF climb 38% year over year, and an increasingly favorable outlook for sales and margins paints an appealing picture for future earnings and dividend growth.
