If you're looking for tech stocks with solid dividend yields and no real risk of payout cuts, look no further than International Business Machines (IBM 0.10%) and Cisco Systems (CSCO -1.84%). Both enterprise-focused tech companies are sustained by key competitive advantages, and both pay out less than half of their earnings in dividends. These two are as safe as dividend stocks get in tech.
International Business Machines
IBM's dividend yield nearly reached 6% during the stock market sell-off in December. A rebounding market and a solid fourth-quarter report in January have propelled the stock about 30% higher since then, pushing the yield back down to about 4.5%. But that's still a historically high yield for IBM, making it a great choice for dividend investors.
IBM trades for just 10 times forward adjusted earnings, even after that rally. Pessimism surrounding its transformation efforts, which have produced years of revenue declines, continues to weigh on the stock price. IBM's total revenue and adjusted earnings per share rose slightly in 2018, but the market hasn't bought into its turnaround story.
I think the market is wrong. IBM's competitive advantages, which include deep and decades-long customer relationships, an entrenched status in certain industries, and a broad set of technologies and capabilities, kept profits rolling in even as the company transformed itself. Its bets on hybrid and multi-cloud computing, artificial intelligence, blockchain, and other technologies have taken time to pay off. But IBM is playing the long game -- exactly what a century-old tech company should do.
IBM's dividend growth will likely be slow for a while as the company digests its massive acquisition of Red Hat. But with a 4.5% dividend yield and a payout ratio of just 45% based on the 2019 adjusted earnings guidance, IBM belongs in your dividend portfolio.
Despite the trade war between the U.S. and China, as well as general economic uncertainty around the world, networking hardware company Cisco hasn't missed a beat. On top of beating analysts' consensus estimates when it reported its fiscal second-quarter results earlier this month, Cisco provided surprisingly solid guidance. The company forecasts its fiscal third-quarter revenue will grow by between 4% and 6%, excluding divestitures.
When it reported its results, Cisco also boosted its dividend by 6% to $0.35 per quarter, good for a yield of about 2.8% at current share prices. That's not nearly as high as IBM's yield, mostly because Cisco stock currently sits at a multiyear high. Cisco's payout ratio, based on analysts' average estimate for full-year adjusted earnings, is around 45%.
Like IBM, Cisco enjoys some competitive advantages. The company's products and services are sticky, so customers are unlikely to switch to a different vendor. Cisco has remained unfazed by the appearance on the market of low-cost networking equipment because it can provide a lower total cost of ownership despite higher upfront costs. CEO Chuck Robbins estimated last year that for every $1 spent on networking equipment, $15 is spent on operating costs over five years. Thus, competitors offering lower sticker prices aren't enough to dethrone Cisco.
Cisco's sales are sensitive to global economic conditions, but its business is stable and resilient thanks to those competitive advantages. That's exactly what you want in a dividend stock.