The tech sector may be known for many things, but generous dividend policies are not all that commonplace. This industry is better known for its high-growth, high-risk investment options.
But there are still a few dividend stalwarts tucked away in this corner of Wall Street. We asked a few of your fellow investors here at The Motley Fool to share their best ideas along those lines, and our panelists came back with three awesome income stocks.
Read on to see why they selected International Business Machines (IBM 0.61%), Cisco Systems (CSCO +0.04%), and Seagate Technology (STX +0.00%) as the best dividend investments in today's tech sector.
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An old tech juggernaut with a new outlook
Chris Neiger (Cisco): Cisco Systems is busy these days reinventing itself from primarily being a seller of routers and switches to a software and subscription services company. After some rocky quarters, it appears the transition is beginning to pay off. In Q2, Cisco grew sales 2.3% and non-GAAP earnings jumped 10.5%, both on a year-over-year basis.
Clearly, Cisco isn't a high-growth tech stock, but the company's new revenue segments outside of its traditional hardware business are growing well and becoming a larger part of Cisco's top line. Recurring revenue accounted for 33% of total sales in Q2, which was up 2 percentage points from the year-ago quarter. The company's CFO, Kelly Kramer, said on the second-quarter call, "We continue to transform our business, delivering more software offerings and driving more subscriptions and recurring revenues," and noted the subscription sales now account for 52% of the company's software revenue.
Cisco reported its third-quarter results on May 16. The company expected revenue growth between 3% and 5% and non-GAAP earnings between $0.64 and $0.66 per share. The results landed at the top ends of these guidance ranges. Having met its guidance targets, Cisco showed respectable growth for a company in transition, and it may have some more good news on the way.
An analyst from Goldman Sachs wrote a few months ago that Cisco may see some tailwinds from the telecom sector, where companies are expected to significantly increase their spending this year on capital improvements, all of which should benefit Cisco's legacy hardware business.
Cisco's yield is at a very respectable 3% right now, and its shares have gained an impressive 36% over the past year, leaving the S&P 500's 14% return in the dust. Investors should understand, though, that Cisco is still finding its footing in this brave new world of software sales and recurring revenue and it'll take a little while longer before we know how well it's navigating its current transformation.
Big dividends and brightening turnaround prospects
Anders Bylund (IBM): There hasn't been a better time to buy IBM as an income stock in the last 25 years. Aside from a very brief stint at 4.4% in February 2016, Big Blue hasn't offered 4.2% yields since the fall of 1993. But that's where the stock stands today, and I think you should lock in those ultra-generous yields while they last.
The company is in the midst of a long and difficult strategic makeover. Management hopes to spark strong profit margins alongside high-growth revenue trends by doubling down on a handful of hand-picked target markets, collectively known as IBM's strategic imperatives. That means sacrificing a lot of top-line sales tied to IBM's computing hardware business in order to sharpen the long-term focus on things like data security, cloud computing, large-scale information analytics, and artificial intelligence.
It's working, you know.
After pulling in this direction for the last five years, IBM now collects about half of its quarterly revenue from the strategic imperatives operations. A multiyear trend toward declining sales appears to have bottomed out in the last couple of quarters, leaving plenty of opportunities to set a fresh high-growth pace for the long haul. Wall Street isn't buying into IBM's revamped strategy, so share prices are running on the affordable side.
Meanwhile, IBM's dividend policy is a thing of absolute beauty.
Whether times are good or bad, Big Blue makes sure that the dividend payouts are growing every year. The company has been known to take on debt in order to finance its buybacks and dividends during lean periods. So the payouts have tripled in size over the last decade and grown a mind-boggling 2,400% larger in 25 years:
IBM Dividend data by YCharts.
You don't even have to believe in a wholesale turnaround in order to see great value in these payouts. But if you do believe -- as I do -- that IBM is headed in the right direction these days, it's just a really great time to pick up some Big Blue shares right now.
High-yielding storage giant
Ashraf Eassa (Seagate Technology): One high-yielding tech stock that investors should keep on their radars is storage drive maker Seagate Technology. As of this writing, Seagate pays a dividend of $2.52 per share, yielding about 4.16%.
Although Seagate isn't the sexiest technology company in the world -- most of its revenue and profitability comes from selling hard disk drives, after all -- the company's dividend looks very sustainable, with free cash flow per share of $4.59 over the last 12 months easily exceeding the dividend (meaning that if Seagate hits a bump in the road, it may not have to cut its dividend).
Moreover, the business is in good shape, too, with Seagate reporting 17% year-over-year revenue growth last quarter thanks to strong demand for its hard disk drives, particularly from its enterprise customers. The company expects revenue to grow by 4% year over year for the entirety of the current fiscal year.
Seagate is a high-yielding tech stock that's ultimately also a pretty solid, albeit low-growth, business. If high-yield tech stocks are your jam, then check Seagate out.
