Investors don't have to stick with consumer goods businesses like Coca-Cola or McDonald's to earn big dividends. Established leaders in the technology industry can also create tons of cash through their businesses, lining shareholders' pockets. Here are three top dogs of the tech world that pay high-yielding dividends to investors.
1. A technology conglomerate
International Business Machines (IBM -0.26%) is a technology conglomerate that sells computer hardware, software, and services to big corporations. Despite being a technology business, its history goes back to the early 1900s, and IBM has been a huge player in supplying enterprises with hardware solutions throughout the decades. The business continues to evolve today, and is pivoting into a software-oriented company specializing in cloud computing, artificial intelligence, and machine learning.
IBM is a very profitable business that generated more than $73 billion in revenue in 2020, coming away with $10.8 billion in free cash flow. Generating such large cash flows enables the business to pass that cash along to shareholders through dividends. The company's dividend has been increased over the past 26 years, and since IBM's payout ratio is only 54% of its free cash flow, there is plenty of room for IBM to continue rewarding its shareholders with a 4.5% yield moving forward.
2. Connecting the world through semiconductors
Broadcom Limited (AVGO -0.70%) manufactures semiconductors and provides software for large corporations. Its semiconductor business focuses on connective uses such as networking, broadband, and wireless technology, and represents more than 70% of Broadcom's $23 billion in 2020 revenue. Broadcom's products are used heavily in the smartphone market; Apple is the company's largest customer.
Many companies that pay large dividend yields often have slow growth rates, but that isn't the case with Broadcom, whose dividend has grown at an average rate of 50% per year over the past five years. Broadcom converted $11.6 billion of its revenue into free cash flow in 2020 and spent $5.2 billion on dividends, for a dividend payout ratio of 45%. Its yield currently sits around 3%. Broadcom's products should remain in demand with rising semiconductor needs in automotive, 5G, and industrial markets, so investors can expect the dividends to keep coming in the years ahead.
3. The "pipes" of the wireless world
Verizon Communications (VZ 0.26%) is a telecommunications company that operates the most widely used wireless network in the U.S. Wireless carriers are almost like utility companies -- the business model is very resilient. In today's day and age, a consumer's phone bill is right at the top of a household budget with the electricity bill and mortgage payment. Verizon is among a small group along with AT&T and T-Mobile that controls the U.S. wireless market. A wireless network connects smartphones, our internet, and the internet of things (IoT), so networks are the digital pipeline of the modern world.
Verizon's business generated $128 billion in revenue in 2020, and like the other companies on this list, it produces a lot of free cash flow -- $23.5 billion last year. Management spent $10.2 billion on dividend payments in 2020, resulting in a payout ratio of 43%, a very affordable expense ratio. Investors won't see extreme growth, because the company invests a lot of money into expanding and maintaining its wireless network. The dividend has grown at an average rate of 2.5% over the past decade and currently yields about 4.5%, but investors can count on Verizon's dividend as a safe and steady grower over the years to come.
Here's the bottom line
High-quality dividend-paying stocks can be a great tool for investors in today's market, where 10-year U.S. bonds are paying just 1.3% interest. These three technology companies are leaders in their industries and have large and profitable business models that produce a lot of free cash flow to pay investors dividends. If you are looking for some investment income, this is a great place to start your search.