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3 High-Yield Tech Stocks to Buy in October

By Nicholas Rossolillo – Oct 6, 2020 at 10:00AM

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Tech may not be the first sector to look for dividends, but some quality income generators can still be had.

Looking for a combination of stock price appreciation paired with dividend income? The tech sector -- not the most common place to go dividend stock hunting -- has plenty of solid options. Three that top my list in October for income-seeking investors are Verizon (VZ -1.77%), Lumen Technologies (LUMN -0.99%), and Taiwan Semiconductor (TSM 2.96%).

America's top mobile network is doing just fine

I recently wrote about scrappy "Un-Carrier" T-Mobile (TMUS 0.72%), long the underdog in America's wireless telecom race, turning itself into a formidable player as the 5G era dawns. While I like T-Mobile's chances at continued growth, it doesn't mean I dislike Verizon or its rock-solid 4.2% a year annual payout.  

Four people using smartphones standing against a red wall.

Image source: Getty Images.

Verizon trades for a lowly 11.6 times trailing 12-month free cash flow. The cheap price reflects this is no longer much of a growth story. Verizon is also saddled with $113 billion in debt due in part to the capital intensive nature of building and constantly improving communications infrastructure. Purchases of now struggling assets from AOL and Yahoo! a few years ago haven't helped the balance sheet either.  

But in today's economy, wireless connectivity is a basic staple. In spite of effects from the pandemic, Verizon's revenues have fallen only 3% during the first half of 2020. And because of cost cuts and disciplined spending on network improvements, trailing 12-month free cash flow has actually increased 25% from a year ago to $21.1 billion -- good for a healthy 16% free cash flow margin. And dividends paid have cost Verizon $5.1 billion so far this year, just 45% of free cash generated.

While Verizon's 5G strategy differs from T-Mobile and AT&T (at this point, Verizon 4G LTE on average outperforms 5G from both of its smaller peers), it has ample room to continue making network improvements, service debt, and pay owners of its stock handsomely. Don't expect any sizzling stock price performance, but this slow-and-steady telecom play is nonetheless still worth owning.

The new-and-improved CenturyLink

Back in March, I decided to part ways with my CenturyLink stock to purchase shares I thought would rebound more quickly from the COVID-19 lockdown market crash. Now, with shares still yielding over 9% a year and the company changing its name to Lumen Technologies (and rebranding its residential and small business segment to catchier Quantum Fiber), I'm mulling taking a position again. 

Lumen has had a revenue problem on its hand. In recent years, legacy communications services (think landline phone, cable TV, and old DSL internet) have been in retreat, offsetting growth the company claims to be enjoying in its newer fiber optic-based offerings for businesses and households. Expanding coverage of these fiber assets is the plan going forward, and the company hopes the rebranding may lead to winning some new deals to rekindle growth.  

It isn't a terrible strategy. And at some point, the legacy business will dwindle away into insignificance and the focus can be shifted to Lumen's more tech-forward global infrastructure and next-gen services built for cloud computing, edge networking, and other "Internet of Things" needs. In the meantime, while sales continue to slowly drift lower, this remains a very profitable business. Free cash flow was $3 billion over the last 12 months on revenue of $21.6 billion.  

Adding to the positive developments, Lumen has been paying down its ample debt ($34.3 billion at the end of June 2020) and refinancing what remains to a lower interest rate, further improving its financial structure. And through the first half of the year, dividends paid have accounted for just 53% of total free cash flow. Despite its imperfections, this high-yield dividend payout is on solid footing.

The world's semiconductor foundry of choice

Taiwan Semiconductor is no household name -- at least not here in the U.S. -- but that could change in the years ahead. TSMC has built itself into the world's leading semiconductor manufacturer, and the U.S. government recently signed a deal to get a TSMC plant opened in Arizona.

This isn't just a story of sheer size either. This fabrication juggernaut has a wide lead in technological prowess, building the most advanced chips on the market with a roadmap over the next few years to continue widening its lead over other foundries like Intel (an increasingly rare chip business that handles both design and manufacture in-house) and GlobalFoundries (spun off from AMD back in 2009).

At first glance, this chip company doesn't look like much of a high-yield play. Shares currently yield 2.1% per year. However, add in the strong growth this company will likely enjoy over the next decade as it continues to handle the lion's share of advanced chip manufacturing, and there's plenty of room for potential dividend payout increases -- not to mention potential share price growth. And a growing dividend can lead to big shareholder returns over the years.  

TSM's stock is up nearly 40% in 2020 to date, even after pulling back slightly in the month of September. Strong growth from 5G network equipment and other high performance computing needs (like for AI) is largely responsible as revenue and profits have surged after a cyclical semiconductor industry slump in 2018 and 2019. At 28 times trailing 12-month earnings (or 110 times trailing 12-month free cash flow, reflecting recent capital expenditures to improve its manufacturing processes), this is no cheap stock.

Nevertheless, for investors wanting to bet on the continued advance of the semiconductor industry and get paid in cash along the way, Taiwan Semiconductor is a great place to start.

Nicholas Rossolillo and owns shares of Verizon Communications. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel, T-Mobile US, and Verizon Communications. The Motley Fool has a disclosure policy.

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