Markets have been rising for years, and the corresponding drop in dividend yields has been a sore spot for income investors. It's even harder to find high-yielding tech stocks, meanwhile, since many industry giants prefer to save most of their cash for reinvesting in growth initiatives.
Investors don't have to sacrifice one of these attractive goals for the other, though. Below, we'll look at a few tech stocks that have strong growth prospects, plus an unusually high dividend yield. Here's why Cypress Semiconductor (CY), Garmin (GRMN 0.47%), and Iron Mountain (IRM 0.28%) deserve a spot on your income stock watchlist.
A well-diversified chipmaker with a 3% yield
Leo Sun (Cypress Semiconductor): Cypress Semiconductor sells a wide range of memory, analog, wireless, and wired connectivity chips. It's the market leader in Wi-Fi/Bluetooth combo chips for Internet of Things (IoT) devices, auto instrument cluster microcontrollers, auto NOR flash memory chips, SRAM memory chips, and USB-C controllers -- all niche markets that bigger chipmakers often overlook.
Cypress, like many other chipmakers, is struggling with softer demand for semiconductors worldwide. Its MPD (memory products division), which generated 41% of its sales last quarter, was also exposed to falling prices for NAND memory chips. Cypress recently spun off its NAND unit into a joint venture with SK Hynix, which should reduce the MPD unit's volatility but impact its near-term growth.
Its MCD (microcontrollers division), which generated the remaining 59% of its sales, also struggled with lower sales of IoT chips and softer demand from its automotive and industrial markets. As a result, analysts expect Cypress to generate negative sales and earnings growth this year. However, Cypress' growth is forecast to rebound next year as the semiconductor market warms up again, especially in connected cars and industrial machinery.
Cypress probably won't rally anytime soon, but it pays a hefty forward yield of 3% to patient investors. Cypress doesn't regularly raise its dividend, but it only spent 39% of its free cash flow on that payout over the past 12 months -- which leaves it plenty of room for future hikes. It also trades at less than 14 times forward earnings. That high yield and low valuation should limit Cypress' downside potential and make it a solid income play.
A value play with a sound growth strategy
Jamal Carnette, CFA (Iron Mountain): At the heart of all great value investments is an incorrect thesis. This is certainly true with Iron Mountain. Shares of the REIT currently yield 7% because investors are weary of its long-term prospects. The bearish thesis is simple: Iron Mountain core business is physical document storage. The increase in cloud computing and e-delivery/signature options has led many investors to feel paper documents will go the way of the buggy whip.
However, Iron Mountain's business hasn't significantly suffered from this shift. According to the company, its retention rate is 98% with a customer list that includes more than 225,000 organizations including nearly the entire Fortune 500. The company has grown revenue 9.7% over the last two years and increased its dividend 16% during this period.
Iron Mountain is aware of the changing landscape and plans to double down on growth in emerging markets, in the data center, and in adjacent businesses by leveraging those existing customer relationships. The combination of low expectations and a sound growth strategy means Iron Mountain should be on your high-yield watchlist.
Find your way to a 2.5% yield
Demitri Kalogeropoulos (Garmin): Its 2.5% yield makes it stand out in the tech world, but Garmin isn't your average consumer tech specialist. Its portfolio of products includes broadly popular categories like smartwatches, but also profitable niches like air and marine navigation. This selection has helped Garmin keep its sales rising in each of the last three years despite dramatic demand swings in wearable tech and a steady decline in the auto navigation segment.
But an even better reason to like this business is its market-thumping profitability. Garmin's string of design and marketing wins in 2018 pushed operating margin up to over 23% at a time when rivals like Fitbit struggled with worsening results. Executives are calling for a fourth straight year of improvements on this key metric in 2019.
Garmin doesn't have a long streak of annual dividend raises, with 2018's boost marking its first one in years. But the company followed that with an 8% hike this year. Given the prospect for steady sales growth and rising earnings, though, investors shouldn't be surprised to see many more annual increases from this GPS tech giant.