Equity markets have wiped away billions of dollars in investor wealth over the past several weeks as the COVID-19 pandemic has driven stock prices down. The broader market sell-off increased the dividend yield of several stocks, making them attractive for income investors as bond yields are touching record lows.
But not every stock with a high yield is a good investment. Investors also should look for the potential for capital appreciation once the markets rebound. Here are five tech stocks that have a significantly higher yield than the S&P 500's average and that I think are worth watching.
The coronavirus pandemic has driven shares of telecom giant AT&T (T -1.22%) to multiyear lows. AT&T has shut down over 40% of its stores, while its Warner Bros. movie studio is likely to experience a massive hit due to the current situation causing delays in production and the closure of movie theaters.
However, its telecom business is somewhat recession-proof as customers are unlikely to cancel internet and mobile subscriptions even in an economic downturn. This should ensure a steady stream of cash flows for the company. AT&T also expects to benefit from its moves in streaming segment and the upcoming shift to 5G.
In case recession fears come true, investors may be worried about AT&T's huge net debt balance of $151 billion. However, the dividend looks safe given that the company in January forecast free cash flow around $28 billion in 2020,. It spent close to $15 billion in dividend payouts last year, which would mean a dividend cut is unlikely if it hits its free cash flow estimate.
AT&T recently suspended a $4 billion share buyback program in order to keep paying dividends. The stock's forward yield stands at a juicy 6.9%.
Another telecom giant that is a dependable pick right now is Verizon (VZ -1.73%). As people are largely staying at home, they are using their phones and home internet more. In a recent interview with CNBC, Verizon CEO Hans Vestberg said the company's web traffic in mid-March was up 20% week-over-week due to an increase in demand for streaming and gaming services. Continued demand should hold Verizon in good stead, helping it overcome the current economic downturn.
Verizon's net debt of $109 billion will make some investors nervous. Further, last month Verizon increased its capital expenditure forecast by $500 million and expects to spend between $17.5 billion and $18.5 billion for 5G rollout and network upgrades in 2020, according to a Reuters report.
However, with a payout ratio of about 50% and steady cash flow, Verizon is one of the most dependable technology stocks. Verizon stock is trading at a forward yield of 4.3% and has increased dividend payments every year since 2006.
Shares of semiconductor chip maker Broadcom (AVGO -1.36%) have also been impacted by the coronavirus outbreak. The stock lost over 50% as it fell from a record high of $331.58 on Jan. 24 to a 52-week low of $155.67 on March 18.
Broadcom is a major Apple supplier, and its shares were driven lower by the latter's confirmation of lower-than-expected sales in the March-ended quarter, as well as lockdowns in China.
Broadcom supplies wireless chips for several smartphone manufacturers and smartphone sales are likely to experience a massive decline due to lower consumer spending and this led to Broadcom's withdrawing its forecast for the April-ended quarter.
However, COVID-19 is likely to be only a near-term headwind. Broadcom investors have enjoyed massive dividend growth in the past decade. It has increased dividends by a staggering 4,500% since December 2010 to its current payout of $3.25 per quarter. The stock now has a forward yield of 5.1% and a payout ratio of 60%. In the last three years, the semiconductor heavyweight increased dividends at an annual rate of 40%.
Another tech giant that has seen its dividend yield move higher in recent times is International Business Machines (IBM -2.32%). The company has become one of the biggest cloud players, driven by its acquisition of Red Hat.
Its cloud business generates over 30% of sales and should continue to experience demand as employees are working from home, which will mean huge data migration on hybrid cloud infrastructures to provide remote access. There is a good chance that the work-from-trend will catch on and several companies will be open to more flexible hours once pandemic fears abate.
But the Red Hat buyout was funded by debt. IBM ended 2019 with net debt of $53.9 billion and free cash flow of $11.9 billion. So, is IBM's dividend sustainable?
In 2019, IBM's free cash flow was flat and it estimates this metric to rise by 5% in 2020 to $12.5 billion driven by the acquisition and expansion of the hybrid cloud business. Comparatively, its earnings growth is forecast at 4%.
In the last year, IBM spent just 61% of earnings per share and 48% of free cash flow to pay dividends, making a dividend cut unlikely. IBM has now increased its dividends annually for 24 consecutive years and might very well become a Dividend Aristocrat this year.
Cisco (CSCO -1.41%) is a networking giant with a forward yield of 3.5%. It has paid dividends for nine consecutive years and increased these payouts at an annual rate of 8.4% in the last three years. At the end of January, Cisco had a cash balance of $27 billion and debt of $17 billion. Its cash reserve will help tide over the company during short-term volatility, helping it to pay dividends.
To combat the COVID-19 pandemic, Cisco recently announced employee layoffs and confirmed that the virus will impact revenue in the next few quarters. However, it still increased its quarterly dividend by $0.01 to $0.36 per share.
Cisco is one of the largest players in the business of collaboration. The collaboration tools provided by Cisco and peers aim to make remote work productive. This segment encompasses a broad array of tools that includes messaging, video and audio communication, time tracking, design and documentation, file sharing, and project management.
The collaboration segment has seen a staggering rise in demand during these uncertain times as employees look to connect and hold meetings online while working from home and this boom should offset weakness in other business segments.
In the coming years, Cisco will continue to benefit from the 5G transition. It is also a major player in the cybersecurity space, another business that will continue to drive top-line growth.
The coronavirus is expected to weigh heavily on stock markets until investors can gauge its impact on the global economy and company financials. Upcoming quarterly results will be critical and could move stock prices lower in case management outlook is bearish.
However, all the five technology companies mentioned here are multibillion-dollar giants with strong fundamentals, low payout ratios, and robust cash flows, making them safe bets in a volatile environment.