Of all the sectors in the stock market, technology stocks probably have the best long-term growth prospects. Cloud computing, 5G communications, artificial intelligence, and the Internet of Things are just a few of the exciting fields that should flourish in the years ahead.
However, the technology space isn't only for growth stocks. Though the tech industry has a boom-and-bust reputation, many steady, cash-producing tech stocks that pay high dividends are also available to investors. Here are three top dividend picks in the technology sector that pay dividends north of 3%.
Taiwan Semiconductor Manufacturing
First, a stock that's giving investors not only a 3% yield, but also roaring growth: Taiwan Semiconductor Manufacturing (NYSE:TSM). TSM or Taiwan Semi is at the center of many of the aforementioned big tech trends, especially 5G. As the world's largest outsourced foundry, it manufactures leading-edge chips from most of the top semiconductor companies in the world today. Apple's (NASDAQ:AAPL) bionic processors? Taiwan Semi makes them. Nvidia's (NASDAQ:NVDA) GPUs? Taiwan Semi makes those, too. Huawei's new chips for its burgeoning 5G business? You get the idea.
Not only that, but Taiwan Semi is also a technology leader in its own right. Last year it surpassed Intel (NASDAQ:INTC) -- the rare semiconductor company that manufactures its own chips -- in the race to produce 7 nanometer (nm) chips at scale. These are the most leading-edge chips in the market. In 2019, TSM has seen such big demand for 7 nm and the upcoming 5 nm nodes that the company is increasing its capital expenditures by some 40% to meet demand.
Last quarter, TSM delivered blowout earnings, with EPS surging 51% over the second quarter, and even 13.5% growth over the year-ago quarter. Since the semiconductor industry is in the midst of a downturn that started last summer, to show year-over-year growth in that environment is downright impressive.
TSM also just hiked its dividend from eight Taiwanese dollars to 10 Taiwanese dollars this year, and implemented a quarterly dividend distribution, versus the former one-time annual dividend. At today's prices, that's around a 3% yield. Management has stated the policy of distributing around 70% of the company's free cash flow as dividends going forward. Given the current 5G growth trends and Taiwan Semi's leadership, that payout seems set to grow in the years ahead.
In contrast to Taiwan Semiconductor's, Texas Instruments' (NASDAQ:TXN) dividend yield has surged to 3% by virtue of its stock price falling following the company's highly disappointing third-quarter earnings report. In contrast to TSM's impressive growth, Texas Instruments saw its revenue fall 12% and earnings per share decline 5.7% in the third quarter.
However, it's not really the fault of the company itself, but rather of broad-based weakness in TXN's biggest end markets, which are automotive and industrial applications. Texas Instruments is competitively advantaged in producing analog and embedded chips for these industries. However, the U.S.-China trade war has taken a toll on these segments of the economy, so TXN is feeling the effects. Texas Instruments doesn't have as much exposure to mobile chips as Taiwan Semi does, which is benefiting from the ramp in 5G, hence the divergence in the fortunes of these two companies.
However, Texas Instruments is still generating lots of cash flow, and just hiked its dividend in September, during this "terrible" quarter. That's the 16th year in a row of dividend hikes for Texas Instruments, which is still one of the best capital allocators in the industry.
Eventually the industrial economic cycle will turn, and Texas Instruments will do better. The time frame is uncertain, but given Texas Instruments' leading position, diverse customer base, and high-margin business, investors will continue to receive a 3% dividend while they wait for better days.
If TSM is the dividend growth stock, and Texas Instruments is the blue chip company at a reasonable price, then IBM (NYSE:IBM) is the value stock of the bunch. IBM currently trades at just 10 times forward earnings estimates and sports a sky-high dividend yield of 4.8%.
However, there are still some potential silver linings for IBM shareholders. Namely, the company's recent Red Hat acquisition should give IBM a long-term growth segment in the software space. Last quarter, Red Hat's revenue accelerated to about 20% growth on a constant currency basis. Additionally, IBM is at the start of a new mainframe cycle, which should boost the company's top- and bottom-line results over the course of the next year. These two drivers should help offset IBM's stagnating consulting business and declines in legacy tech services as well, and enable IBM to continue paying down its debt load.
Still, IBM is a bit riskier than the other two companies. It's a laggard in the field of cloud computing, and you could say that IBM's business was actually "disrupted" by the rise of the cloud giants. IBM is now trying to catch up by promoting private clouds and hybrid solutions, as IBM's bread and butter is managing on-premises IT for large companies.
Though the company's cloud revenue grew 14% last quarter, that's a bit slower than many other companies in the space, and that includes the effect of the Red Hat acquisition. Overall, revenue actually fell slightly last quarter -- though some of that decline was due to the end of the prior mainframe cycle.
Despite these concerns, IBM appears to be stable enough and cheap enough that its stock is enticing at these levels. Nevertheless, shareholders shouldn't just buy the stock for its high yield, but should also monitor the company's turnaround prospects and execution going forward.