With the market hovering near historic highs, it might seem risky to start positions in new stocks. However, investors should still accumulate shares of income-generating stocks with high yields and low valuations, which usually act as safety nets during market downturns. Here are three high-yielding tech stocks that fit the bill: Seagate Technology (STX +0.00%), IBM (IBM 2.08%), and China Mobile (CHL +0.00%).
Seagate
Seagate is the top manufacturer of platter-based HDDs (hard disk drives) in the world. Sales of HDDs have decelerated over the past few years, due to competition from flash-based SSDs (solid state drives) -- which are faster, smaller, more power-efficient, and less prone to damage than HDDs -- and slowing sales of PCs.
Image source: Getty Images.
That sounds like bad news for Seagate, which refused to diversify aggressively into SSDs like its main rival Western Digital. Instead, Seagate pivoted away from PCs and lower-capacity drives and focused on selling higher-capacity drives to data centers, many of which still preferred cheaper HDDs to pricier SSDs.
Instead of investing in new technologies, Seagate regularly spends over 100% of its free cash flow (FCF) on buybacks and dividends. It spent two-thirds of its FCF on its dividend over the past 12 months, and currently pays a forward yield of 4.3%.
Seagate's revenue fell 7% last year, due to cyclically lower sales of PCs and data center drives. However, its declines decelerated over the past two quarters as its gross margin stabilized, and analysts expect its revenue and earnings to rise 1% and 2%, respectively, this year. Those improving fundamentals -- along with its high yield and low forward P/E of 11 -- indicate that Seagate is an undervalued dividend stock.
IBM
IBM didn't impress investors with its 1% growth in revenue and earnings last year, and analysts expect its revenue and earnings to decline 3% and 7%, respectively, this year.
The tech giant struggled as the slower growth of its legacy software, hardware, and IT services businesses offset the stronger growth of its newer cloud and AI-oriented businesses. Currency headwinds and a reduction of buybacks exacerbated the pain.
But IBM isn't down for the count yet. It closed its $34 billion takeover of Red Hat earlier this year, and it expects the takeover to contribute about two points of compound annual revenue growth over the next five years. Its cloud business also continues to grow as it focuses on hybrid cloud deployments (which bridge the gap between private and public clouds), and it expects demand for its mainframes to accelerate again.
Image source: IBM.
Analysts expect those tailwinds to boost IBM's revenue 3% and 4%, respectively, next year. Those are decent growth rates for a stock that trades at just 10 times forward earnings while paying a forward yield of 4.8%.
IBM spent just 46% of its FCF on its dividend over the past 12 months, and it could become a Dividend Aristocrat -- a member of the S&P 500 that's raised its dividend for at least 25 straight years -- if it hikes its dividend next year. That low valuation and high yield make it a top income stock to own.
China Mobile
China Mobile is the largest state-backed telco in China, with 946.5 million wireless customers and 187.8 million wireline customers. However, its stock dipped about 10% this year due to several major challenges.
First, the Chinese government forced China Mobile and its peers to lower their wireless fees and eliminate data roaming charges to boost the country's mobile penetration rates. Second, China Mobile is a major component of the Hang Sang Index in Hong Kong, and the year-long protests rattled most Hong Kong stocks. Lastly, the trade war and economic slowdown in China caused many investors to shun Chinese stocks.
China Mobile is expected to generate nearly flat sales growth and about 2% earnings growth this year, but it's still a well-run company with a wide moat. The company pays semi-annual dividends, which are set every year based on a payout ratio of 40%-50%.
China Mobile has raised its dividends annually for three straight years (excluding a special dividend it paid in 2017), and it pays an estimated forward yield of about 5%. The stock trades at less than 10 times earnings -- which makes it cheaper than many of its American telco counterparts.
China Mobile isn't out of the woods yet, but trade tensions are waning, and 5G upgrades are right around the corner. Those tailwinds could counter the headwinds and spark a rally next year.
