Dividend investing is a simple way to accumulate wealth over the long term, especially when investors leverage the power of compounding by reinvesting their dividends. Income investors often focus on high-yielding stocks in the real estate, telecom, and energy sectors -- but there are also plenty of great dividend plays in the tech sector. Let's examine four income-generating tech stocks that belong in your portfolio.
Image source: Getty Images.
Cisco
Cisco (CSCO +1.95%) is the largest manufacturer of network routers and switches in the world. Those are slow-growth businesses, but Cisco has been working to diversify its portfolio with cybersecurity products, wireless services, and collaboration software.
Cisco currently pays a forward dividend yield of 3.1%. It spent just 46% of its free cash flow (FCF) on that payout over the past 12 months, and it has raised the dividend annually for seven straight years. Analysts expect its earnings to grow 8% this year, and the stock trades at a reasonable 15 times forward earnings.
Cisco also recently repatriated $67 billion in overseas cash, which will be applied toward buybacks, dividends, and domestic acquisitions. Those moves should tighten up its valuation, attract more income investors, and widen its competitive moat.
IBM
IBM (IBM +1.93%) is a diversified tech company that offers IT services, business software, mainframes, and cloud services. IBM has been investing heavily in the growth of five "strategic imperatives" -- its cloud, mobile, security, analytics, and social units -- to offset the slower growth of its legacy IT services and business software businesses.
IBM recently broke a six-year streak of revenue declines with two straight quarters of sales growth. During the first quarter of 2018, IBM reported that its strategic imperatives revenue grew 12% annually over the past 12 months and accounted for 47% of its total revenue. Analysts expect IBM's earnings to grow just 1% this year, but the stock looks cheap at 10 times forward earnings.
More importantly, IBM's forward dividend yield of 4.4% should limit the stock's downside potential. Big Blue spent 41% of its FCF on that payout over the past 12 months, and it has raised its dividend annually for over two decades.
Image source: Getty Images.
Qualcomm
Qualcomm (QCOM 0.38%) is the largest mobile chipmaker in the world. It generates most of its revenue from mobile chipset sales, but it makes most of its profits from licensing its wireless patents. The company expanded into custom chips for wearables, connected cars, and other devices in recent years, and is currently trying to acquire NXP Semiconductors to become the world's top automotive chipmaker.
Qualcomm currently faces probes and lawsuits from regulators and original equipment manufacturers, which claim that its licensing fees are too high. Its bid for NXP also faces an uncertain outcome due to the low percentage of tendered shares. Those headwinds are expected to cause Qualcomm's earnings to tumble 24% this year before rebounding next year.
Qualcomm's stock might not seem like a bargain at 17 times forward earnings, but its 4.3% forward yield could set a floor under the stock. Qualcomm spent 91% of its FCF on that dividend over the past 12 months, and it's raised that payout annually since 2003.
Seagate
Seagate (STX +0.00%) is the world's second largest maker of HDDs (hard disk drives). HDDs have been losing ground to SSDs (solid state drives) in recent years in the consumer market, but demand for HDDs in data centers -- which prioritize storage capacity over raw speed -- remains high.
Instead of aggressively diversifying into SSDs, Seagate's main focus is to boost the capacity of its HDDs for those customers. That strategy helped Seagate sidestep the flash memory shortages and price hikes that are hurting other device makers. The company only has a limited presence in the SSD market.
Analysts expect Seagate's earnings to grow 29%, and another 4% next year. The stock trades at just 11 times forward earnings, and it pays a forward yield of 4.3%. That dividend, which has been hiked annually for seven straight years, used up just 48% of Seagate's FCF over the past 12 months.
