Stocks related to the technology industry historically tend to draw growth rather than income investors. However, as tech companies mature (like any other company trading publicly), they can reach a point where management decides to devote some part of an increased cash flow toward dividends.
Moreover, a few of these tech companies do well enough to not only increase their payouts annually but even to offer cash yields well above the S&P 500's current average of 1.3%.
Three companies, in particular, might be of interest to tech investors looking for income. They are: International Business Machines (IBM -0.89%), Seagate Technology Holdings (STX -0.90%), and Verizon Communications (VZ 0.88%). Let's find out a bit more about each.
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1. IBM
IBM is in the midst of a transformation. The recent spin-off of its managed infrastructure business into a company called Kyndryl (KD -0.30%) removes a noncore business from its balance sheet. Moreover, its purchase of Red Hat in 2019 has allowed IBM to build a new company around the cloud and supercomputing.
Also, management promised that the two companies would maintain the current combined dividend. Nonetheless, it appears IBM holds the entire payout, now at an annual level of $6.56 per share.
Additionally, this dividend not only yields 5.2%, but it has also risen for 26 consecutive years, making IBM a Dividend Aristocrat. This leaves the dividend in a position that the yield will likely remain generous even if some of that payout shifts to Kyndryl. Furthermore, $11 billion in adjusted free cash flow over the last 12 months has allowed IBM to finance the $6 billion cost of the dividend over that period.
However, for the first nine months of fiscal 2021, the free cash flow of $5 billion barely covered the $4.4 billion spent on dividends. Also, the company has underwhelmed with its financial performance. IBM reported only 2% revenue growth in the first nine months of 2021 compared with the same period in 2020. And thanks to higher taxes, net income fell during that period. The stock reversed the previous seven months of stock gains after IBM revealed those numbers.
Nonetheless, IBM said on its Q3 2021 earnings call that it forecasts a free cash flow of $35 billion between 2022 and 2024, indicating the dividend faces few dangers. Moreover, as IBM completes its cloud transformation, it should face fewer troubles, driving stock gains and continued payout hikes.
2. Seagate
Seagate has specialized in data storage since its founding in 1978. While its product offerings have evolved along with the tech industry, today it focuses on hard disk drives, emphasizing storage for the cloud and portable products such as laptops.
Fortune Business Insights forecasts that cloud storage will grow into a $390 billion industry by 2028, a 26% compound annual growth rate. Unlike its competitor Western Digital (WDC -2.64%), it did not transition heavily into the flash memory business, sticking with more traditional hard drives.
This move appears to have paid off for its investors. Over the last five years, Seagate's stock price has risen by almost 185%, while Western Digital's stock has remained flat.
STX data by YCharts
Moreover, this growth does not include dividends. While Western Digital does not offer investors a payout, Seagate has increased its dividend most years since resuming payouts in 2011. For the third consecutive year, Seagate will hike its dividend following the first quarter of its fiscal year, this time by just over 4%. This takes the annual payout to $2.80 per year, a yield of about 2.9% at current prices.
More importantly, Seagate can afford this dividend. In Q1 2022, the free cash flow of $379 million covered $153 million in dividend payments. Also, in fiscal 2021, which ended July 2, the company generated $1.1 billion in cash flow and paid $649 million in dividends. With the growth in cloud storage, the future should bode well for both Seagate's dividend and the stock in general for years to come.
3. Verizon
Verizon is one of only three companies in the U.S. offering nationwide 5G cellular service. However, it has led the way in many respects, earning quality awards from the likes of JD Power, winning the most awards for network quality for 27 consecutive years.
That streak could likely continue. Verizon spent more than T-Mobile and AT&T combined in acquiring C-Band spectrum in the latest auction. This spectrum gives Verizon access to critical frequencies in specific markets that will allow it to pivot more aggressively into the network-as-a-service (NaaS) business. NaaS service connects AI and IoT devices wirelessly to its network, forming an additional source of income that did not exist in the 4G era.
Moreover, thanks to AT&T's upcoming dividend cut and Verizon's recent 2% payout hike to $2.56 per share annually, Verizon offers the highest cash yield in its industry at 4.9%. Due to the $17 billion in free cash flow for the first nine months of 2021, Verizon could finance the $8 billion in dividend costs during that time. Also, with 15 years of consecutive increases, the annual payout hikes will likely continue.
Despite this payout, Verizon has struggled on a few fronts. The $53 billion spectrum purchase early this year has taken total debt levels to $151 billion, and the stock has fallen 11% this year.
Still, that drop has taken its P/E ratio to 10. Also, with a high, sustainable payout and the prospects for a new, burgeoning business in 5G, Verizon should continue to connect with income investors.
