The technology sector hasn't traditionally been a great place to search for top-notch dividend stocks, but there are exceptions. Cisco Systems (CSCO -0.35%) and International Business Machines (IBM 0.04%) are two tech stocks that pair high-yield dividends with plenty of free cash flow and decent long-term growth outlooks. Here's why long-term investors should consider these two stocks.
Cisco Systems
There's been plenty of competition in the enterprise switching and routing market over the past few decades, but Cisco has managed to maintain a stranglehold on the industry. While lower-cost alternatives are available from companies like HP Enterprise, Cisco's products haven't lost much popularity with data center customers.
The Ethernet switch market churned up $36.5 billion in sales in 2022, while the enterprise and service provider router market generated $16.5 billion of revenue. Cisco has a dominant share in both markets. According to IDC, the company ended the year with a 43.3% share of the Ethernet switch market and a 35.1% share of the router market. In the Ethernet switch market, the next largest competitor has less than a quarter of Cisco's share.
This dominance has led to solid revenue and earnings growth, albeit with some ups and downs driven by economic conditions. Cisco increased revenue by 7% year over year in its latest quarter, and it expects to produce roughly 10% growth in its current fiscal year. Gross margin hovers above 60%, and that number has the potential to rise as Cisco expands its software business.
Cisco's impressive profitability allows the company to pay a generous dividend, and that's on top of consistent share repurchases. The company aims to return at least 50% of free cash flow to shareholders annually. The latest quarterly dividend of $0.39 per share, equating to a 3% increase over the previous dividend, works out to a dividend yield of about 3.4%.
While an uncertain economic environment may test Cisco later this year as its customers pull back on spending, the company is firing on all cylinders right now. And even when the tide turns, Cisco still generally delivers solid results thanks to its iron grip on its core markets. For investors looking for a stable, mature tech stock that pays a nice dividend, Cisco is a great choice.
International Business Machines
The most important thing to know about IBM is that its customers depend on the company and its products. One example is the iconic mainframe. IBM's mainframe systems may seem like relics, but big companies around the world still turn to IBM when reliability and security are of the upmost importance. Of the top 50 banks in the world, 45 of them run on IBM's mainframes.
While the mainframe will remain a critical part of IBM's business, the future is all about hybrid cloud computing. Turbocharged by its acquisition of Red Hat, IBM's hybrid cloud business aims to help customers modernize their IT infrastructures. OpenShift, Red Hat's hybrid cloud platform offering, has now reached a $1 billion annual recurring revenue run rate. And in typical IBM fashion, the company not only sells the software necessary for hybrid cloud computing, but it also offers consulting services and hardware aimed at powering hybrid cloud infrastructures.
The stickiness of IBM's solutions has helped the company report good results despite uncertain economic conditions. Revenue grew by 4% at constant currency in the first quarter of 2023, and the company expects as much as 5% revenue growth for the full year. Free cash flow should come in around $10.5 billion, up a double-digit percentage from 2022.
That free cash flow fuels IBM's reliable dividend. The company has paid uninterrupted quarterly dividends since 1916, and with the latest increase earlier this month, it has now boosted the dividend for 28 consecutive years. The current quarterly dividend of $1.66 per share produces a forward dividend yield of roughly 5.3%.
As far as dividend stocks in the tech sector go, it's hard to beat IBM.
