Technology stocks are known for a handful of common characteristics. Paying dividends is not one of them. These companies typically reinvest the bulk of their profits into developing new and better tech and attempting to grow their sales.
If you dig deep enough, though, you can find a handful of technology stocks that pay surprisingly solid dividends. Here are three you may want to consider stepping into before 2024 arrives. Buying now will help you take advantage of higher interest rates that not only work against growth companies but favor dividend-paying value stocks -- no matter what business they're in.
1. HP
There's no denying that HP (HPQ -0.46%) (formerly known as Hewlett-Packard) isn't close to being the technology titan it once was. Neither consumers nor corporations buy computers as often as they used to. Further, in the early stages of the pandemic, there was a huge surge in computer purchases as people upgraded their machines so they could work and attend school remotely. That pulled a large volume of business forward, and the resulting ripples of lower demand are still being felt: HP's personal computer revenue fell 19% during the fiscal year that ended in October.
Even the ultra-patient Warren Buffett is giving up on the company. Berkshire Hathaway has been selling off the stake in HP it began acquiring early last year, likely locking in modest losses.
While Berkshire is backing off, you might want to use this misunderstood outfit's recent weakness as an entry point.
Yes, HP is in the computer business. PCs account for about two-thirds of its total sales. That segment is not a particularly great profit producer, though. HP's much smaller (by revenue) printing business produces around 60% of its profits, and its printing business is very, very reliable. That's because the paperless offices that computers were supposed to create when they started to become common back in the 1990s have given us the capacity to print more pages than ever. And workers are using that option to the fullest.
Data source: HP. Chart by author.
This, of course, is precisely what makes for a great dividend-paying stock -- an underlying business based on a product the world is willing to pay for over and over again.
Newcomers will be plugging into the stock while its dividend yield is just a hair under 3.6%. Its quarterly payout, by the way, has grown from $0.16 per share five years ago to a little over $0.27 per share now. That's an annualized growth rate of a little over 9%.
2. IBM
Like HP, IBM (IBM -1.05%) was once royalty among technology names. Not any longer. The company mostly missed out on the rise of cloud computing and mobile connectivity. By the time it started to pivot into those arenas in 2016, it was too late. The stock had already begun a sell-off that would last for years, reflecting the company's lost ground. Many investors have forgotten about IBM in the meantime, presuming it wouldn't recover.
Well, those people may want to take a fresh look at the stock now. It just hit a six-year high. And, if the company's new business lines and business model are any indication, more new highs could be in the cards.
Simply put, IBM's core focus these days is hybrid cloud computing and all of its ancillary businesses. These add-on businesses range from artificial intelligence to cloud management cybersecurity to automation, to name a few.
The thing is, offering such turn-key cloud computing solutions means IBM can generate a combination of software, hardware, and consulting revenue from any given client.
"Our approach to hybrid cloud is platform-centric," CFO Jim Kavanaugh explained during the Q4 2022 earnings call in January. "As we land a platform, we get a multiplier effect across software, consulting, and infrastructure." He didn't divulge specific numbers at the time, but Kavanaugh has commented in the past that "for every dollar that we land on [sales of] the [hybrid cloud] platform, we get $3 to $5 of software and $6 to $8 of services revenue."
It seems we're finally seeing the measurable benefit of this dynamic. Last quarter's software revenue was up 8% year over year, while consulting revenue improved 6% on much more modest infrastructure sales growth of only 2%. And this is largely recurring revenue that helps support a dividend. IBM not only maintained its payouts during the rough patch it was going through a few years ago, but it has raised them for 28 consecutive years.
At current prices, new investors would be buying the stock with a dividend yield of a little more than 4%.
3. Cisco Systems
Last but not least, add Cisco Systems (CSCO -0.50%) to your list of dividend-paying technology stocks to buy. Currently, it's yielding a respectable 3.1%.
Not unlike IBM and HP, Cisco's glory days came in the late 1990s and early 2000s. That's when it was riding the then-rapid growth of the personal computer market. Cisco's role in that movement was supplying the world with the modems, routers, and switches needed to connect PCs to the internet and to one another. It still manufactures this hardware, although demand isn't quite as fevered now as it was then. New entrants into the ethernet switch and router market are also competitive against market-leading Cisco.
The networking hardware business has changed, however, in a way that helps keep Cisco surprisingly competitive. See, in step with other kinds of related technologies, switches, and routers are now powered by adaptable and updatable software. The company did $4.4 billion worth of software business during the fiscal quarter that ended Oct. 28 -- roughly one-third of its total sales. Its subscription-based businesses produced a total of $6.5 billion worth of sales for the quarter, accounting for nearly half of the company's top line.
This isn't a coincidence. It's by design. As CEO Chuck Robbins commented during the earnings call, "We continue to transform our business toward more software and recurring revenue streams fueled by accelerated innovation." The word "recurring" is key here, as it translates into predictable, reliable cash flow that in turn funds continued dividend payments. To that point, Cisco's annualized rate of recurring revenue stands at $24.5 billion, which is just under half of last year's total top line.
You'll probably never get great growth from Cisco stock. You'll certainly get good income, however, from a dividend that management has now raised for 13 consecutive years.
