The year 2020 has been a huge one for growth stocks. In spite of a pandemic-induced recession, the S&P 500 is up nearly 15% on the year with just a week to go before 2021 -- propped up in large part by high-growth technology names that have more than weathered the COVID-19 health crisis. And with a new digital era dawning in the wake of that crisis, technology stocks are set to continue expanding.
These new tech stock darlings are getting a lot of attention right now, but you shouldn't ignore more mature names in the tech world that are also doing well and also happen to pay dividends.
1. IBM: A top cloud name with a top dividend payout
I recently called IBM a top cloud computing stock given its plans to offload some of its legacy business in 2021 to focus on its highest-growth cloud computing expertise. But as investors wait for IBM to spin off its older and lower-profit-margin segments, the company is already executing on some of its new growth plans.
In recent weeks, IBM has announced several acquisitions, the latest being Nordcloud, a leader in managed cloud services in Europe. If small takeovers like this can help IBM maintain its double-digit percentage cloud growth in the years ahead, this could be one cheap stock at a mere 8.7 times trailing 12-month free cash flow (revenue minus cash operating expenses and capital expenditures). However, IBM has more going for it than just growth potential.
Shares also currently yield one of the tech industry's best dividends, currently at 5.2% a year. Granted, there's a reason for this high yield and the "cheap" share price: IBM overall has been in slow but stubborn revenue decline for years as smaller and more nimble technologists gain at its expense in the fast-growing cloud universe. There's no telling if IBM will be able to permanently turn back the tide when it separates itself from some of its older lines of business next year. The dividend policy is also subject to change once IBM completes the divestiture.
Nevertheless, IBM's core portfolio of expanding cloud computing services look like a worthy investment to me, and the current dividend (which cost IBM $5.78 billion over the last year) is well supported by free cash flow ($10.8 billion over the same stretch). For investors that want a balance of income and future growth potential, this old tech stock learning new tricks looks like a solid pick.
2. Broadcom: A semiconductor leader paying rich rewards
The pandemic was a tough period for many semiconductor companies. Forced to make budget cuts during the lockdown in the spring months, many of their customers delayed investments into IT infrastructure, and consumers opted to hold onto old smartphones for a bit longer to conserve cash. As a result, Broadcom's core networking hardware and semiconductor business fell 1% year over year in 2020 to $17.3 billion.
However, Broadcom could be poised for a rebound in 2021 as many of its customers adapt to the times and spending on IT normalizes. The 5G smartphone upgrade cycle is also underway. Case in point: Broadcom's semiconductor sales grew 6% year over year in its fiscal 2020 fourth quarter, and its outlook for Q1 2021 implies a 12% increase in overall revenue from a year ago. That outlook is propped up by further rebounds in its hardware sales, as well as its faster-growing infrastructure software segment.
In fact, Broadcom's most recent results were good enough to prompt an increase in its quarterly dividend to $3.60 per share, an 11% pay raise for shareholders. As of this writing, that makes this tech stock good for an annual yield of nearly 3.4%. And with free cash flow coming in at $11.6 billion in the last year (and the dividend only costing Broadcom $5.53 billion), the payout is easily covered by this tech giant's highly profitable operations.
Sweetening the deal further is Broadcom's solid growth outlook and a stock valuation of just 15.5 times trailing 12-month free cash flow. This looks like a reasonable deal for a company returning to growth after a difficult year, with a generous dividend to boot. And with networking and connectivity needs not going away anytime soon, Broadcom remains one of my top semiconductor holdings for the long haul.
3. Comcast: Internet saves the day, and media set for a rally
Comcast isn't the highest-yielding dividend around, with a 1.8% annual yield as of this writing. But it should nonetheless be worthy of consideration for investors looking for income from their technology holdings. Adjusted for stock splits, Comcast's dividend payout has doubled two times over in the last decade.
Regardless of how you feel about Comcast (customer service is often severely lacking), there's reason to believe this dividend could continue to expand in the next decade. Internet service is a basic staple, and Comcast remained in growth mode in this department during the pandemic. In fact, high-speed internet connections and a small but fast-growing mobile service (which Comcast licenses from Verizon's mobile network) more than offset losses in cable TV and traditional phone. Broadcast and cable TV networks from Comcast's NBC Universal and Sky subsidiaries were also a mixed bag this year, but overall stable results offset weakness elsewhere in the company's film segment (due to theater closures) and theme parks (Universal Studios remains closed in California, and is on restricted operation elsewhere).
Nevertheless, with high-speed internet and other connectivity services likely to remain a stable business in 2021, the stage may be set for a big rebound elsewhere at Comcast. If travel makes a comeback as the effects of the pandemic ease, theaters and theme parks could start to pull their weight again. Comcast will also be lapping less-than-ideal financial results in these segments from the spring 2020 months during the peak of the economic lockdown. Thus, at 16.7 times trailing 12-month free cash flow, this looks like one reasonably priced stock.
This is no high-tech name, but Comcast is nonetheless worth considering for those looking for some investment income. Its high-speed internet and connectivity bread-and-butter is very profitable, and as a result, the dividend payout ($3.09 billion through the first nine months of 2020) is handily covered by positive free cash flow of $10.2 billion so far in 2020. With its business due for a rally once COVID-19 is beaten, this is a top dividend pick with room for a higher payout in the years ahead.