Great dividend stocks offer more than just generous dividend yields. Income investors should also look for solid business models that can support the dividend checks with strong cash flows. The company's board of directors must have a public commitment to returning cash to shareholders through some combination of dividends and share buybacks. A long history of rising payouts also helps.
You can find fantastic dividend payers in nearly any industry, including in the tech sector. Tech stocks are better known for high-growth opportunities, but mature companies in this sector are often eager to return cash directly to their shareholders. On that note, here are three high-quality tech stocks that combine generous dividend yields with rock-solid business prospects.
Broadcom: 3.8% yield
Semiconductor designer Broadcom (AVGO -0.91%) offers an effective dividend yield of 3.8% at today's prices. That's not a byproduct of plunging share prices, either. Broadcom's stock is up 9% year to date and 22% over the last 52 weeks.
The real story looks something like this:
Broadcom's dividend increases are both predictable and bountiful. As a result, the dividend yield has been trending upward for many years, nearly doubling since the start of 2018.
But there's more. Broadcom's free cash flows have grown nearly sixfold over the last five years, and only 46% of the last year's free cash was spent on dividend payouts. The company can pursue further payout increases, splashy acquisitions, and other cash-intensive ideas without risking the dividend policy's cash flow funding.
On top of all that, Broadcom is eyeing serious growth opportunities in the next few years. The company is a major force in wireless radio processors and should benefit from the incoming 5G technology boom. Chips tailor-made for artificial intelligence systems could also drive growth, as could next-generation Wi-Fi chips.
Broadcom investors get the best of both worlds. The company's solid dividends come with a side of exciting growth opportunities -- or the other way around, if you're more of a growth investor.
IBM: 5.2% yield
Technology giant IBM (IBM 0.79%) requires no introduction. Big Blue has nearly completed the transition from a one-stop shop for every enterprise computing need into a more focused specialist in artificial intelligence, data analysis, computer security, and other high-margin software and service offerings.
IBM's meaty 5.2% dividend yield springs from decades of shareholder-friendly cash management policies and 8% lower share prices year to date. The 20-year dividend payment chart is a thing of beauty:
The company didn't even stop its payouts in the darkest days of the dot-com crash. The COVID-19 pandemic led to a smaller dividend boost than usual, but the increases still kept coming. The cash payout ratio stops at 48%, just above Broadcom's current reading.
I'll admit that IBM's strategy shift is getting long in the tooth and that many investors have tired of this ultra-patient approach. But the company's cash flows are strong, the dividend yield is downright lavish, and IBM should reap generous rewards from this margin-boosting transformation in the upcoming age of artificial intelligence and deep data analysis.
Silicon Motion: 3.7% yield
The next name is perhaps the most surprising on my list. Silicon Motion (SIMO 0.20%) is a much smaller business than Broadcom or IBM and its dividend policy is much younger, but the storage controller specialist is showing a serious commitment to cash-based shareholder returns, and its payouts have doubled in four years. This company spent 57% of its trailing free cash flows on dividend checks, leaving plenty of wiggle room for future payout boosts.
Silicon Motion's yield stands at 3.7% today. Low share prices played an important part in these generous yields because the stock has fallen 25% in 2020. We're talking about a leading provider of controller processors for storage systems based on NAND flash memory chips, and that's a difficult place to do business this year. Consumer demand is weak for devices with lots of NAND memory, such as smartphones and tablet computers. NAND-based enterprise storage devices are heading into the mainstream, softening the blow to some degree, but many investors still worry about permanent damage to Silicon Motion's most important target market.
So the stock is trading at just 12 times forward earnings estimates, pushing the effective dividend yield 50% higher year to date. I think that the concerns about Silicon Motion's long-term prospects are overblown and the stock is a great buy at these low prices, as it includes a generous and fully cash-backed dividend policy.