Technology stocks have led the market's growth over the last two decades, and some companies in the field now offer substantial dividend payments in addition to underappreciated growth potential.
While the sector in the past didn't have much to offer investors seeking big yields, that's changed, as many large businesses have shifted into slower growth phases or entered transitional stages that encouraged their management to offer dividends.
Because technology is being increasingly integrated into nearly every facet of industry, no other sector looks better poised to drive overall growth across the next decade -- and it now also hosts some of the most compelling dividend plays on the market. Investors seeking income-generating stocks should short-list Qualcomm (QCOM 3.65%), Verizon (VZ 0.80%), and Cisco Systems (CSCO 1.40%) -- three companies that offer substantial yields and have the potential to post market-beating gains as they help to ease revolutionary technology shifts.
Qualcomm has bounced back from big sell-offs at the end of 2018 and is up more than 35% in 2019, pushing its forward earnings multiple to roughly 18.5 even as the business is enjoying some significant windfalls. On the other hand, the company's share price is still roughly flat over the last five years, and investors seeking a combination of sizable dividends and capital-appreciation potential might find a lot to like about the stock.
The stock's performance has been depressed over the last half-decade by legal challenges to the business' crucial technology licensing segment, a protracted attempt to acquire auto-chip leader NXP Semiconductors that ultimately stalled out, and a slowdown in mobile combined with rising competition in the Chinese market.
There are still threats to the licensing business that's responsible for over half of the company's earnings, particularly as Chinese hardware giant Huawei has gained market share and is increasingly relying on its own chips. But Qualcomm is well positioned to benefit from the next big growth catalysts for the mobile market.
Apple's agreement to pay licensing fees for use of Qualcomm's mobile wireless technologies will not only increase the latter company's earnings roughly $2 per share this year, but it also puts the chipmaker in better position for the transition to 5G network technology by securing better licensing rates until Apple can come up with a suitable modem alternative. Qualcomm's intellectual property will be at the heart of high-end smartphones from most major manufacturers, and acceleration for 5G adoption is projected to push the chip giant's earnings to roughly $6 per share in the next fiscal year, if that's when the Apple settlement is realized. Shares are currently priced at less than 13.5 times that target and yield roughly 3.1%.
It's worth pointing out that the company is set to snap its 16-year streak of annual dividend growth this December after announcing another quarterly dividend of $0.62 per share, so investors prioritizing dividend growth may want to look elsewhere. However, Qualcomm shares already sport a substantial yield, and the stock looks like an appealing play in 5G despite the big gains this year.
Verizon boasts America's largest mobile-wireless subscriber base and stands out as another compelling 5G stock that offers a sizable returned-income component. It sports a 4% dividend yield and a 13-year history of annual payout growth.
The cost of covering its dividend comes in at a reasonable 62% of its trailing-12-month free cash flow. With the mobile internet market set for long-term expansion thanks to tech trends like Internet of Things (IoT) connectivity and the rollout of networks that offer dramatically higher upload and download speeds, Verizon's business is sturdy enough to support more payout hikes and could see significant earnings-growth acceleration over the next decade.
The stock's yield does come in below the roughly 5.5% yield of telecom rival AT&T -- another company that deserves attention from income-focused investors. But Verizon sports lower debt levels and has less exposure to the declining pay-TV industry that's weighing on AT&T's performance. Both of America's wireless leaders look like strong foundation-level picks for income-focused portfolios, but investors looking for a more focused bet on the mobile service space will probably find Verizon stock to be the more attractive proposition.
Mobile wireless leaders have been locked in a heated competition that has elevated service standards and eroded pricing strength, but Verizon's aggressive push into 5G is likely to create significant differentiation between its offerings and less expensive packages from Sprint and T-Mobile.
Verizon's leading position in the U.S. mobile wireless market sets it up to capture a big share of the consumer transition to 5G. Its status as a leader also lets it benefit from improved pricing strength, and from growth in the number of service connections as categories like connected cars and wearables expand.
Shares are not prohibitively priced at roughly 12.5 times this year's expected earnings, and investors can count on the telecom company to continue paying big dividends.
Cisco stock has slumped following underwhelming guidance and a subsequent rating note from Goldman Sachs analyst Rod Hall that downgraded it from buy to hold and said that trade issues could be a protracted drag on the networking giant's business.
Even with a tentative "phase one" trade deal between the U.S. and China, investors can hardly take a neat resolution to the situation for granted. But the recent pullback could present a worthwhile buying opportunity.
Cisco Systems is trading at roughly 14 times this year's projected earnings and yielding roughly 3%, and the business continues to look well positioned to benefit from the data boom and drive payout growth. Despite its share buybacks, fast dividend growth, and big push to acquire businesses and assets to aid its transformation for the next generation of networking technology, Cisco still boasts a net cash position of roughly $8 billion.
The business also generated roughly $14.9 billion in free cash flow last year -- or about $3.35 per share -- which is enough to fund its forward dividend distribution more than twice over.
Cash flow could see some downturn in the near term related to integrating new units, other costs related to expanding network functionality, and slowed enterprise spending due to trade issues and other macroeconomic concerns. But the dividend is well funded, and the company has some compelling growth opportunities.
Outside of trade and macroeconomic risks, the rise of offerings in the router and switching space that offload hardware functions to the cloud for processing is likely the biggest threat to Cisco. The business will be pressured if it can't add features that keep customers in its ecosystem amid improved functionality for generic, white-box alternatives. But progress on that front is being aggressively funded and has generally been encouraging.
The company has been adding service components to its hardware offerings and snatching up businesses that can improve its standing in security, analytics, device management, and new WiFi technology. This comprehensive approach might prove very valuable as customers move to build out their 5G infrastructure and account for the complexities created by growth for connected devices and the overall data load. And Cisco's hefty dividend should make it easier to wait for these initiatives to spur substantial bottom-line growth.