Technology stocks tend to have a reputation as poor dividend plays. As tech stocks often focus more on growth, having any profits left over to fund dividend payouts is typically not a priority, even among the companies that generate consistent profits.
There are some exceptions to this general trend, with income investors finding reliable payouts from tech stalwarts like AT&T, IBM, and Verizon Communications. Over the years, these stocks have managed to generate high cash yields year in and year out.
But it's during a bear market, where yields on stocks tend to rise (sometimes to the 5% range or higher) in proportion to the fall in the stock price that long-term investors can find some buying opportunities. The current bear market should give income investors an extra incentive to consider dividend stocks Seagate Technology Holdings (STX +7.91%) and Digital Realty Trust (DLR 0.04%). Let's take a closer look at these two tech dividend stocks.
1. Seagate
Admittedly, many investors may have given little thought to Seagate in recent years. It has existed since 1979 and benefited from decades of growth as a leader in PC hard drives.
But despite its ties to the PC business, the company has adapted to the times. It has now built on its core competency in storage to offer a wide array of cloud-related services. This includes storage-as-a-service, backup, edge computing, data migration, and other offerings.
Like many tech companies, though, the bear market has taken a toll. The $2 billion in revenue for the first quarter of fiscal 2023 (which ended Sept. 30) fell 35% compared with year-ago figures. The company blamed growing macroeconomic uncertainties and cautious customer spending for that decline on its Q1 2023 earnings call.
Nonetheless, the size of the decline and lack of guidance was shocking, and one can understand the stock price being down 40% over the last year.
NASDAQ: STX
Key Data Points
That lower price creates an opportunity for dividend investors. First, Seagate's P/E ratio of seven takes the valuation to multi-year lows. Second, it can pay a higher cash return. Its current annual dividend of $2.80 per share yields around 5.2% at current prices. Although the company has not raised the payout yearly, it has not cut the dividend since it resumed paying a dividend in 2011.
And even though Q1's free cash flow of $112 million was below the $147 million cost of the dividend, it can probably afford to continue the current payout. Seagate currently holds $761 million in cash. Additionally, in fiscal 2022 (which ended July 1), the $1.3 billion free cash flow for the year covered $610 million in dividend costs.
Investors need to remember that tech is a cyclical business. Fortune Business Insights forecasts a compound annual growth rate (CAGR) for the global data storage industry of 24% through 2029. This increases the likelihood that Seagate can recover from this rough quarter and continue its dividend growth, and eventually stimulate growth in the stock itself.
2. Digital Realty Trust
Digital Realty Trust is technically a real estate investment trust (REIT), not a tech company. However, it supports a unique niche in real estate and tech: data center REITs. This type of real estate provides the physical security, air-cooled chillers, and reliable power needed to support data center functions.
Grand View Research forecasts that the data center market will expand at an 8% CAGR through 2030. Digital Realty seems to agree with that assessment as it has positioned itself to capitalize on this market with over 300 data centers worldwide. Also, it said on its Q3 2022 earnings call that it continues to build more data centers as it forecasts strong secular demand for the foreseeable future.
Moreover, the REIT status exempts it from paying income tax on its operations, as long as it pays at least 90% of its net income out to shareholders as dividends. Not only has it paid dividends since 2005, but it has also increased them yearly at an average CAGR of 10%. The current payout stands at $4.88 per share annually, which amounts to a dividend yield of 4.9%.
Also, in the first three quarters of 2022, Digital Realty generated nearly $1.4 billion in adjusted funds from operations (AFFO) income, a proxy for a REIT's free cash flow. Considering the average 79% payout ratio, its dividend remains quite sustainable for a REIT.
Moreover, the dividend yield rose significantly due to poor stock performance. The company's stock peaked around the new year and lost just under 45% of its value.
NYSE: DLR
Key Data Points
However, it now sells for around 16 times its trailing AFFO income and 22 times its earnings. That P/E ratio takes its valuation near multi-year lows. When one also considers the rising data center demand, increasing dividends, and discounted stock price, Digital Realty should pay investors passive income for years while it makes long-term stock gains.
