Technology is often associated with growth, but did you know there are actually several high-yielding dividend stocks in the sector as well? In fact, some of the best dividend stocks around may be in tech, given the long-term tailwinds around cloud, the Internet of Things, 5G communications, and other growth opportunities.
While many technology companies are fast-growers that don't pay a dividend and trade at very high valuations, value investors may find hefty, well-covered dividends in International Business Machines (IBM 1.05%), Broadcom (AVGO 0.61%), and Lumen Technologies (LUMN -5.15%).
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International Business Machines: 5.5% Yield
Investors have cast aside IBM in recent years, as its results have been somewhat stagnant over the past decade, especially relative to the overall technology sector. However, it's quite possible the hate has gone too far. Today, IBM has multiple catalysts that point to a potential turnaround, as well as a cheap valuation. Meanwhile, thanks to consistent dividend increases and a declining stock price, IBM's stock yields a whopping 5.5%.
New CEO Arvind Krishna has been making several bold moves since taking the job in April of this year. First, he was apparently the mastermind behind IBM's huge $34 billion acquisition of open-source software giant Red Hat just over one year ago, before taking the top job.
Krishna looks to integrate Red Hat's software into IBM's hybrid cloud and cognitive software and systems business as he reorients the company around hybrid cloud technology and AI applications. To accomplish this and refocus the company, IBM recently announced it would be spinning off its low-growth managed infrastructure consulting business into a new public company. That should reorient IBM's managers to the higher-growth opportunity in hybrid cloud, and could unlock lots of incremental value. Another exciting recent announcement was IBM's new collaboration with red-hot Advanced Micro Devices (AMD -0.35%) around open-source "confidential computing" for artificial intelligence and cloud workloads.
Insiders appear to be excited about the new direction, as seven IBM directors have each bought significant amounts of stock over the past month. Given the magnitude of insider buying, value investors don't want to sleep on this potential "old tech" turnaround story.
Broadcom: 3.5% yield
Another cash-cow tech stock is chipmaker Broadcom. "Diversification" is really the big differentiator for Broadcom, which has positioned itself exceptionally well amid several big communications applications. Under the visionary leadership of CEO Hock Tan, Broadcom has taken a private-equity-like approach to the semiconductor industry, acquiring several chipmakers and folding them into Broadcom's high-performance culture and efficient operating structure. Today, Broadcom's portfolio includes many industry-leading chips in sockets across data centers, customer home wif-fi, mobile RF filters, IoT sensors, and more.
But Broadcom's reach doesn't stop there, as the company began buying software companies in 2018, including infrastructure software provider California Technologies and then enterprise cybersecurity firm Symantec in 2019, broadening its reach and further diversifying its business.
These diverse revenue streams have led to significant cash flows for Broadcom, which has grown its free cash flow from just $1.7 billion in 2015 to a current run-rate of $12.4 billion today, covering the company's 3.5% yield more than two times over.
Lumen Technologies: 10.4% yield
Finally, for those looking for a bit more risk but certainly more potential upside, Lumen Technologies, formerly known as CenturyLink, continues to get the cold shoulder from Mr. Market. That's despite solid profitability in recent quarters and a dividend that now yields over 10% -- and that's after the company cut its dividend by more than half in early 2019!
Lumen has no doubt felt the ill effects of declining legacy products such as copper-based broadband, landline phones, and other increasingly obsolete technologies. Still, the recent quarter provided glimpses of hope as newer fiber-based products showed signs of growth.
While Lumen continued to post revenue declines of 3.4% last quarter, that was an improvement from the 4.8% declines in the year-ago quarter, and actually fairly strong in the middle of a pandemic. Furthermore, the company's largest segment, its enterprise division, grew on both a sequential and year-over-year basis, showing that CenturyLink's irreplaceable global fiber network is coming in handy for enterprises that need fast and secure distributed communications. Even in the struggling consumer division, which continues to shed customers, Lumen gained subscribers in geographies where it's deploying fiber connections that exceed 100 Mbps.
Furthermore, Lumen continues to wring out more cost synergies two years from the closing of its massive acquisition of Level 3 Communications, with $730 million of cost reductions realized to date, out of a projected $800 million to $1 billion. Those cost reductions have helped keep adjusted EBITDA relatively flat in recent years, and even growing slightly quarter-over-quarter in Q3, with management projecting further sequential profit improvements in Q4.
These better-than-feared results show that Lumen's dividend is handily covered about three times over by free cash flow, and Lumen is using those excess cash flows to chip away at its roughly $32.5 billion in debt. The successful debt paydown has also allowed Lumen to refinance many of its high-yield notes at much lower rates, allowing the company to actually reduce its net cash interest expense guidance for the year.
At just six times next year's earnings estimates and around three times free cash flow, Lumen is trading at bargain-basement levels despite relatively steady results. If the company can get leverage its global fiber network to outgrow legacy technology declines and actually start seeing overall revenue growth, the stock could appreciate many times over -- although Lumen's high debt load does remain a risk.
