While the tech sector primary attracts growth investors, there are a handful of tech businesses that offer up meaningful dividend payments, too.
So which tech stocks offer an above-average dividend yield and are smart buys today? We asked a team of Motley Fool contributors to weigh in, and they picked Microsoft (NASDAQ:MSFT), International Business Machines (NYSE:IBM), and Equinix (NASDAQ:EQIX).
A steady history of dividend increases
Ashraf Eassa (Microsoft): Software giant Microsoft is firing on all cylinders. During the fiscal year 2018, the company's most recently ended fiscal year, Microsoft saw revenue surge 14% and operating income pop 21%.
Microsoft also enjoyed growth across the board, with its productivity and business-processes segment growing 13%, its intelligent cloud segment surging 23%, and its more-personal computing business growing at 17%. Factoring out the impact of foreign exchange movements, these figures were a little less impressive -- 10%, 20%, and 16%, respectively -- but those numbers still represented double-digit growth off of large baselines.
Analysts also expect Microsoft to continue its robust growth, with a consensus calling for revenue to grow by 10.9% in the current fiscal year, and for earnings per share to increase by about 9.8% .
Microsoft shares currently yield 1.56%, which is a respectable dividend yield these days, especially in the world of technology stocks. What's more encouraging than that yield number is that Microsoft has a history of steady dividend increases:
If Microsoft continues to thrive, and the company keeps boosting its dividend, then the effective dividend yield on shares purchased at current prices will continue to move up.
If tech stocks that pay respectable and growing dividends appeal to you, then check Microsoft out.
Big Blue has a big dividend
Tim Green (International Business Machines): IBM hasn't always been a great dividend stock. Sure, the company has paid a quarterly dividend without fail for over a century. And in each of the past 23 years, that dividend was increased. But IBM's dividend yield was unimpressive until recently. A stock slump brought on by almost six years of revenue declines has changed the story, turning IBM into a high-yield tech stock.
IBM's dividend yield touched a two-decade high recently, and it now sits at about 4.3% based on the latest announced payment. That's more than double the dividend yield of the S&P 500, and well above the dividend yields of most other large tech stocks.
Of course, a generous dividend yield doesn't mean much if a dividend cut is likely. In IBM's case, the dividend looks entirely safe. The company expects to produce about $12 billion of free cash flow this year, putting the payout ratio based on that number at just 48%. Revenue is rising again, driven by the strength of IBM's cloud business and its latest mainframe system. And margins could expand as IBM's growth businesses, which skew more heavily toward software than the rest of the business, increase in scale.
IBM has a lot of moving parts, and the company's transformation is still very much a work in progress. But as a dividend stock, Big Blue is tough to beat.
Connecting you to the internet (and income)
Brian Feroldi (Equinix): The demand for data has exploded in recent years, and is projected to continue rapid growth for the foreseeable future. That paints a bullish backdrop for all of the data-center REITs that are absolutely vital to keeping the information flowing.
As the largest player in the space, Equinix is a great company for investors to buy to play the trend. The company owns and operates more than 200 data centers that are strategically placed around the world. Equinix rents space in its data centers to more than 9,800 customers, which makes its business incredibly well diversified.
A great feature of Equinix's business model is that the vast majority of revenue is recurring. Better yet, there are ample opportunities for management to reinvest capital back into the business to help drive future growth, too.
A look at the company's recent results shows that the playbook continues to work well. Revenue and adjusted funds from operations per share -- which is a REIT proxy for earnings -- jumped by 28% and 25%, respectively. Those are numbers that should grab every investor's attention. Income investors will also appreciate that Equinix has a market-beating yield of 2.1%.
Overall, Equinix offers tech investors fast growth and income. That's a powerful combination.
Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Ashraf Eassa has no position in any of the stocks mentioned. Brian Feroldi has the following options: short January 2019 $185 puts on IBM, short January 2019 $180 puts on IBM, long January 2020 $170 calls on IBM, and short January 2020 $170 puts on IBM. Timothy Green owns shares of IBM. The Motley Fool recommends Equinix. The Motley Fool has a disclosure policy.