Tech companies as a group are known more for avoiding dividends than for paying them. Many of them seem far more focused on investing the cash they earn back into their businesses than they are on rewarding investors.
But there are some more mature tech companies that have embraced the idea of paying dividends, and a few offer yields that are significantly above the S&P 500's current average of 1.5%. Investors who want to focus more on income than growth may want to consider picking up some shares of International Business Machines (IBM 1.51%), Broadcom (AVGO 1.74%), and Digital Realty Trust (DLR -1.47%). Let's find out a bit more about these three dividend-paying tech stocks.
1. IBM
IBM shareholders have benefited from 27 straight years of dividend increases -- a streak of hikes that earned it the status of Dividend Aristocrat. It now pays $6.60 per share annually, and its yield of 4.8% at the current share price makes it a leader among tech dividend stocks.
Admittedly, IBM stock has disappointed investors in some areas. Management increased the dividend by less than 1% in each of the last three years. Moreover, the stock price's growth over the past five years has been negligible as its legacy businesses have stagnated.
Nonetheless, it sought to change its fortunes with the $34 billion acquisition of Red Hat in 2019. That move, combined with the 2021 spinoff of its managed infrastructure business as Kyndryl, has made IBM a cloud stock. It's putting serious focus on the hybrid cloud niche, offering platforms where public and private clouds can interact seamlessly.
The company, which not long ago was struggling to generate growth, experienced a 9% year-over-year revenue increase for the first half of 2022. Also, it forecasts $10 billion in free cash flow for 2022. Admittedly, it only generated $3.3 billion in free cash flow for the first half, putting it behind the pace to hit that estimate, but its exit from Russia and foreign currency exchange headwinds weighed on its results.
However, it brought in enough to cover its $2.9 billion in dividend payouts for the period, which should reassure income investors. As it boosts its free cash flow again, IBM appears to offer not only a high dividend yield but also the serious possibility of a stock price turnaround.
2. Broadcom
Broadcom was one of the few tech companies to embrace dividends soon after its IPO in 2009. In 2010, shareholders received a single quarterly payout of $0.07 per share. Its payouts would grow quickly -- so much so that its annual dividend now stands at $16.40 per share. At the current share price, that amounts to a yield of approximately 3%.
Investors will appreciate that management increased its payouts for 2022 by 14% and boosted them by 11% in 2021. This year's hike should outpace the inflation rate. Furthermore, the stock continues to outperform the S&P 500.
Broadcom was traditionally a semiconductor solutions enterprise that served other businesses. However, in 2018, it ventured into enterprise software. Assuming it can complete its recently announced acquisition of VMWare, enterprise software will make up around 45% of its revenue.
Broadcom has thrived on both relationships and innovation. It spent nearly $1.3 billion on research and development in Q2 alone. Also, it employs engineers near its largest clients to collaboratively provide semiconductor and software solutions that can serve these clients.
Moreover, cash flows indicate that the dividend growth could continue. In the second quarter, its free cash flow increased 21% from year-ago levels to almost $4.2 billion. That far exceeded the $1.75 billion cost of its dividend. This all makes Broadcom a monster opportunity investors should not ignore.
3. Digital Realty Trust
Digital Realty Trust's annualized dividend of $4.88 per share yields about 3.8% at the current stock price. Additionally, it has hiked its payout at least once every year since its inception in 2004.
Despite its role in the tech industry, Digital Realty Trust is a real estate investment trust (REIT). That means its shareholders are almost guaranteed to keep collecting payouts, a benefit most dividend stocks do not offer.
Moreover, it has maintained its payouts at sustainable levels. Digital Realty generated about $936 million in adjusted funds from operations income (a favored metric for gauging a REIT's cash flow). Of that, it paid out $716 million in common and preferred dividends, meaning it can likely also afford to continue hiking its payouts.
It bankrolls this dividend by providing data center spaces featuring climate control, physical security, and the power capacity its clients require. This means its business will likely rise and fall with the data center sector, making it easy for tech investors to understand. Such investors likely already know that research firms like Grand View Research forecast that through 2028, the data center market will grow at a compound annual rate of 13%, taking its value to $118 billion. That indicates that Digital Realty should be able to keep expanding its payout over time.
