Income investing and the tech industry might seem like polar opposites. Technology companies are typically home to groundbreaking innovations like artificial intelligence and self-driving cars. Their stocks are also the starting point for many investors seeking capital appreciation, but the area is largely ignored by income investors, in favor of more traditional dividend plays.
That doesn't mean that high-yielders can't be found among the tech giants, and investors may be doing themselves a disservice by bypassing the potential for significant growth while they receive their regular dividend payments.
With that in mind, we asked three Motley Fool investors to choose tech companies that pay a high yield, while offering the potential for additional growth. They offered convincing arguments for Verizon Communications Inc. (VZ 0.12%), Qualcomm Incorporated (QCOM 0.91%), and International Business Machines (IBM +0.90%).
Image source: Getty Images.
Let this stable dividend compound
Steve Symington (Verizon): With an annual dividend yield of 4.8%, supported by its status as the largest wireless carrier in the U.S., I think investors would do well to pick up shares of Verizon today.
Most recently, the company ended 2017 by adding 1.2 million retail postpaid wireless connections in the fourth quarter, bringing its total to 116.3 million. Verizon also maintained excellent customer loyalty with postpaid phone churn of 0.77%, the metric's 11th straight quarter below 0.9%. Combined with modest growth from its Fios segment -- where increases in Fios Internet customers have more than offset losses in Fios Video connections -- as well as sales from its Oath subsidiary, which encompasses more than 50 media and tech brands including Yahoo!, tumblr, TechCrunch, HuffPost, and AOL, management says investors can safely expect Verizon to deliver solid low-single-digit percent growth in both revenue and adjusted earnings this year.
And thanks to recent U.S. tax reform, Verizon estimates that its operating cash flow this year will benefit to the tune of $3.5 billion to $4.0 billion -- a sum it will use primarily to strengthen its balance sheet. This shouldn't be terribly surprising, as the company is investing heavily in the impending commercial launch of its 5G network set for later this year.
Image source: Getty Images.
In the end, that launch should serve to further solidify Verizon's wireless leadership. And I think that makes Verizon Communications a great stock for investors looking for an attractive combination of income and stability.
A forgotten chipmaker
Jeremy Bowman (Qualcomm): High-yield tech stocks aren't easy to find. Since the industry is full of young, high-priced start-ups, it doesn't tend to lend itself to dividend payouts as these companies would rather invest in their own growth than reward investors with a dividend. Many tech companies are not even profitable, and if they are, much of their excess capital is plowed back into research and development.
However, there are exceptions to this rule, and Qualcomm presents one such example. The chipmaker sports a 4.2% yield, better than nearly any other tech company, and its historically fat profit margins are a sign of the success of the business. However, Qualcomm has underperformed the market as the stock has actually fallen 17% over the last five years at a time when big tech companies have boomed. Its revenue has declined in recent years as well, as its patent licensing business is not as strong as it used to be.
Image source: Qualcomm.
The company is now focused on moving into growth markets like autonomous vehicles and the Internet of Things, and is in the process of acquiring NXP Semiconductors, which should help its position in driverless cars. Qualcomm's blocked acquisition by Singapore-headquartered Broadcom, due to national interests, also shows the value of the company's assets and patent portfolio, as the concern was that its assets would fall into foreign hands.
As a dividend payer, Qualcomm has been reliable as it's hiked its dividend every year since it initiated the payout in 2003 and its payout ratio of 67.7% is still reasonable. With lawsuits still pending and the need to pivot into new businesses, Qualcomm remains a risky bet, but if you're looking for a high-yield tech stock, the chipmaker has the potential to reward you in more ways than one.
A long awaited turnaround
Danny Vena (IBM): Investors in computing giant IBM recently received news they've been waiting to hear for more than five long years. After posting 22 consecutive quarters of year-over-year revenue declines, the company finally returned to growth.
IBM has been embroiled in an ongoing transition from many of its legacy businesses to newer, high-growth initiatives that the company calls strategic imperatives, which include cognitive computing, analytics, cloud computing, security, and mobile. These activities accounted for 46% of IBM's revenue in 2017 and that percentage is only expected to grow.
The company has consistently paid a dividend for more than a century, though there were some declines in the '90s. IBM is looking to join the storied ranks of Dividend Aristocrats in the next several years, with 22 consecutive years of increases. IBM's dividend currently yields 3.8% and the company is widely expected to increase the payout this month after reporting its first-quarter financial results. These consistent increases have resulted in a dividend that has grown by 200% over the past decade.
Data source: IBM Dividend data by YCharts.
IBM has a payout ratio of 49%, using less than half its adjusted income to support its dividend, so there's plenty of room to support future increases.
Excluding the one-time charge related to recent tax legislation, the stock also trades at a significant discount, at just 13 times its trailing-12-month adjusted earnings, about half that of the S&P 500.
This combination of potential growth, high-yield, and a modest valuation make IBM a solid choice for income investors.
