Dividend investors tend to ignore tech stocks. As an industry focused heavily on emerging companies and rapid growth, these enterprises have often chosen to reinvest in themselves rather than distribute cash to shareholders.

However, maturing tech companies have tended to buck this trend, and many offer payouts well above the S&P 500 average yield of 1.6%. A combined portfolio of AT&T (T -0.67%), International Business Machines (IBM -1.95%), and Intel Corporation (INTC -5.16%) demonstrates such cash flows. A comparatively modest investment can yield $1,000 in total annual income.

A cash cow yielding 5%

Justin Pope (AT&T): Investing in telecom giant AT&T is like hitting the easy button for dividend investors. It pays a quarterly dividend, adding up to an annual total of $1.11 for shareholders. You'll need to buy an even 300 shares to generate $333 in annual dividend income, a total investment of $6,370 at today's share price.

AT&T is the leading U.S. telecom company, with an estimated 43% of the wireless market. Only a couple of companies, Verizon and T-Mobile, compete with AT&T because the billions of dollars needed to invest in upgrading and maintaining cellular networks each year discourage new companies from entering the industry.

Additionally, smartphones have become central to modern society's way of life, which means that people typically pay their phone bills, regardless of what the economy's doing. It's more a household necessity than a discretionary luxury these days.

AT&T's had a challenging decade, taking on a lot of debt to acquire DirecTV and Time Warner to build an entertainment business. It didn't work out, and AT&T sold and spun off its entertainment assets to become a pure telecom again.

The company received $43 billion from the Time Warner spin-off to pay down debt, and management reduced the dividend payout ratio to just 40% to 43% of estimated free cash flow. Remember that AT&T yields more than 5% despite the cut, and now shareholders can feel great that the dividend is affordable.

Analysts believe AT&T's earnings per share (EPS) will grow by almost 4% annually over the next three to five years. You're going to buy AT&T for that juicy dividend, but getting some growth with it should help fuel future dividend increases while adding to your total returns.

Investors looking for passive income should consider this old-school tech name

Jake Lerch (IBM): If you're looking to maximize passive income, there are certain elements your stock investments should have. It might even help to develop a checklist, to ensure that each stock you own has the necessary ingredients that make up a great passive income stock. Here's mine:

  • Substantial dividend yield
  • Low volatility
  • Significant free cash flow or cash on hand
  • Reasonable valuation

One tech company that ticks all these boxes is IBM. Let's run through each element.

Dividend yield

IBM pays $1.65 quarterly -- $6.60 per share annually -- good for a 4.8% dividend yield. IBM shares currently trade at $137.50, so 50 shares (a $6,875 investment) will generate $330 in annual dividend income.

Low volatility

Volatility is a measure of price stability. Beta is a mathematical expression of volatility. Stocks with a beta of 1.0 correlate perfectly with the S&P 500 index, while those with a beta of 2.0 would have twice the index's volatility. IBM has a beta of 0.94, meaning the stock trades more or less in tandem with the S&P 500 index. This level of stability is near the sweet spot when looking for stocks that generate passive income. 

Significant free cash flow or cash on hand

IBM generates $9.47 of free cash flow per share, or $8.6 billion in total. As of its most recent quarter, the company had $10.5 billion in cash or cash equivalents. However, it does have a significant debt load, with over $57.6 billion in debt. Nevertheless, it's generating enough cash and has enough on hand to continue servicing its debt and paying its current dividend. However, investors should keep an eye on IBM's balance sheet; rising interest rates could force it to cut its dividend if it cannot generate enough free cash flow.

Reasonable valuation

IBM's current price-to-book ratio is 6.5, while its 10-year average is 8.1. This valuation is neither cheap nor expensive, as it hovers between similar legacy technology companies like Texas Instruments (price-to-book of 9.9) and Cisco (4.4).

The one-time chip industry leader that's emerged as a surprising dividend stock 

Will Healy (Intel): Intel looks like a counterintuitive choice at first, as its former rivals seem to have eclipsed this longtime industry leader. However, Intel has set a goal of recapturing its lead, and it's showing partial signs of success. According to a Morgan Stanley report, Intel's Alder Lake CPU has caused AMD's revenue to decline by 26%, an indication Intel can still compete in this market.  

Meanwhile, Intel's stock has declined amid the tech sell-off. It also faces pressure due to the tens of billions it plans to spend to enter the foundry business and attempt to catch up technologically with the current foundry industry leaders, TSMC and Samsung.

But that stock price drop could highlight Intel's $1.46 per share annual dividend, which now yields 3.9%! Though that yield slightly lags those of AT&T and IBM, an $8,380 investment (about 228 shares) will yield about $333 yearly.

Moreover, Intel has increased this payout most years since 2004, and amid company struggles, it should maintain that pace. In 2021, it generated $11.3 billion in free cash flow, enough to cover the dividend's $5.6 billion cost.

This doesn't mean Intel's struggles have ended. In the first quarter of 2022, it reported $18.4 billion in non-GAAP revenue, a 1% drop year over year. The rising cost of sales and increased operating expenses caused non-GAAP net income to fall 35% during that period to $3.6 billion.

However, the stock sells for a price-to-earnings ratio of six, and it has fallen to less than 1.5 times its book value, arguably making it too cheap to ignore. This is especially true for dividend investors, as payouts will likely continue to rise.

Intel's goal of becoming the chip industry leader still looks like a tall order. However, if it can achieve at least partial success, its income, stock price, and dividend payout should rise significantly over time.