Let's talk about tech stocks and dividends. Now, it's not uncommon for investors to overlook the tech sector when they're looking for top dividend-paying stocks. After all, many tech companies are chasing maximum revenue growth and would rather reinvest their spare cash into tomorrow's growth instead of today's dividend checks.
However, the market took a dip in 2022 and that changed the game. With stock prices down, mature tech companies with solid dividends have become more attractive. And even though we're in a bear market, technology is still moving forward, and some of this innovative progress filters down into top-line growth and solid dividend payouts. This presents a unique opportunity for investors to earn some income through dividends while also potentially benefiting from future revenue and dividend growth in the tech sector.
Here in early 2023, I'm keeping a close eye on Intel (INTC 0.61%) and HP Inc. (HPQ -0.40%), two tech titans with generous dividend yields and potential for significant stock price gains over the next couple of years. Let me show you why.
Don't count Intel out yet
Intel's stock gained 11% in late October, thanks to a robust third-quarter earnings report that also revealed an aggressive cost-cutting plan. The company plans to save $3 billion on the cost of goods sold and operating expenses in 2023, adding up to roughly $9 billion of cost savings by the end of 2025.
The PC market has been slow, and demand for server chips from enterprise and cloud customers hasn't been great either. In order to stay afloat, Intel is taking some drastic measures, like cutting costs and laying off employees. It's also trying to be more efficient in how it sells and markets its products. All of this is to maintain free cash flow, which is expected to be negative this year (meaning they'll be losing money).
Now, assuming Intel can keep its cash burn under control, its balance sheet should be able to support the dividend for now. At the end of Q3, the company had $24.5 billion in cash and investments and $39.5 billion in debt. Keep in mind that the dividends cost about $6 billion each year, so Intel can keep paying them even without any free cash flow for a few years.
Once Intel's current cycle of heavy infrastructure investments is over and the company reduces its capital spending, free cash flow should start to improve. This manufacturing push is a multi-year effort, so we can expect high capital expenditures for a while. Improving sales of PC and server chips would also help. Even if demand in the market stays weak, once Intel's customers clear out their own inventory, Intel's sales should align better with actual demand.
It isn't cheap to build and upgrade some of the most world's advanced chip-making facilities. However, Intel appears to have the funds required to keep the dividend payments going, even during an extended cash crunch.
At the same time, many investors have lost faith in Intel's ability to dominate the chip sector and keep paying those juicy dividends. The yield stands at an ultra-generous 5.1% while Intel's shares are changing hands at the bargain-bin valuation of 8.9 times trailing earnings. So you can lock in high dividends and low share prices buy buying Intel shares today. That sounds like a great deal to me.
Berkshire Hathaway loves HP, and that's a good sign for the rest of us
The printer and PC arm of the storied Hewlett Packard business lives on as HP Inc., while its enterprise software and services split off into Hewlett Packard Enterprise in 2017.
HP Inc may not sound like a terribly exciting investment, but it is an undeniable value stock with modest but unstoppable long-term growth. So much so, in fact, that Berkshire Hathaway bought 121 million shares of the company in April 2022. Now, master investor Warren Buffett's company owns 11.4% of HP's stock, giving it an imposing presence in any shareholder vote. In short, HP's board and management should check in with Buffett's team before making any game-changing decisions.
HP returns plenty of cash to shareholders through a combination of steady dividends and opportunistic share buybacks. Together, these two strategies returned $5.3 billion of HP's spare cash to shareholder pockets over the last four quarters. That's up from $4.1 billion two years ago. Buffett loves beefy dividend policies, and HP Inc delivers a yield of 3.7% these days.
Printers and PC systems may go through temporary market dips but these devices will be around for many decades. The stock is about as volatile as the S&P 500 (^GSPC 0.87%) index, but HP shares are trading for just 9.4 times trailing earnings and 7.7 times forward earnings estimates. It's like owning an S&P 500 index-tracking fund, but with lower valuation ratios and more than double the index's 1.6% dividend yield.
