Solid dividend stocks build wealth in the long run. That's a fact.
But successful dividend investors must look beyond the highest yields to avoid hidden dangers. That's another open secret.
I'm about to share three of the best dividend stocks in the tech sector, but don't expect a simple lineup of the three largest yields. Instead, I have curated a short list of attractive income generators with a rock-solid balance of strong payouts, affordable buy-in prices, and sturdy business models that will keep those dividends coming -- and growing -- for many years.
Here, you'll see the sky-high yields of Windstream Holdings (NASDAQ:WIN), the unshakable efficiency of Seagate Technology (NASDAQ:STX), and a rare buy-in opportunity on tech legend IBM (NYSE:IBM). There's something here for every type of income investor, and you might even want to build a position in all three.
Big payouts, slow growth
Regional telecom operator Windstream is the first dividend stock on our dance card today. With a fantastic 12.6% dividend yield today, this stock may look like an obvious winner. But things get complicated when you consider Windstream's total lack of dividend growth since 2007:
I would have included a banana for scale if I could, but a popular S&P 500 tracker also gets the job done.
That flatline is enough to keep many dividend investors far, far away from Windstream. It's not at all the kind of dividend-boosting history you want to see in a serious income stock.
But you know that old adage about past performance and future returns? Usually trotted out to support a word of caution regarding a high-flying stock, the same idea also applies when the recent past looks bleak. In Windstream's case, things are about to change.
The company is on the verge of splitting into two separate companies, you see.
Windstream will spin off most of its networking assets as a real estate investment trust, or REIT. This operation must then pay out at least 90% of its taxable income in the form of dividends, or else it will lose the tax-sheltered REIT status.
So we'll end up with a dividend-focused REIT and a potential growth stock in the remaining telecom operations ticker. The transaction will also unlock additional value across the two companies, and will help Windstream lighten its debt-laden balance sheet somewhat.
What's more, you could actually uncover a 20% value boost by getting your Windstream shares before the split. The total value of your shares will grow, and you'd lock in something like a 9% dividend yield to boot -- with a brand new promise of increased payouts in the future.
It's hardly a traditional income play today, but still an interesting dividend stock for slightly adventurous investors. Don't invest your entire nest egg in Windstream today, but do feel free to build a small income-yielding position.
Every rose has its thorns
Remember how the S&P 500's average dividend growth made Windstream look frozen in place? Well, compared to Seagate Technology, this time it's the market index that seems stuck up the creek without a dividend growth paddle:
Granted, it hasn't been a smooth climb. The hard drive maker actually slashed its payouts in 2010, halting its dividend policy altogether for a few quarters. These episodes can linger in the minds of income investors, automatically crossing Seagate off their dividend-focused research lists.
That payout pause was partly motivated by the stumbling global economy at the time, but that's not the whole story. The yield was shooting past 12% at the time, and Seagate CEO Steve Luczo explained that something more like a 3% dividend yield would be a far more sensible use of surplus cash.
Luczo's choice turned out to be valuable in 2011, when natural disasters played havoc with Seagate's supply chains across Southeast Asia. The dividend made a quick comeback, powered by rising cash flows.
Since July of 2011, Seagate's shares have more than tripled in value, and the dividend yield sits at 4%. Seagate is latching onto the solid-state drive movement, and remains a giant in the traditional spinning-disk storage market.
Today, Seagate is both a growth stock and a fantastic dividend payer. It even comes with a side dish of awesome operating metrics, including a 67% return on equity. In short, Seagate is a great steward of its shareholders' investments. That's always good news for long-term dividend investors.
The walking definition of "blue chip"
IBM is much closer to Plato's ideal dividend stock than Seagate or Windstream.
Big Blue has paid quarterly dividends without interruption since 1916, raised its payouts 15 years in a row (through recessions and high water), and currently offers a healthy 2.8% yield. IBM has a history of raising capital only to accelerate its cash returns to shareholders.
IBM's payouts per share have increased by 450% over the last decade. Share prices rose 76% over the same period -- or 109% if dividends were reinvested along the way:
The technology giant knows how to keep shareholders happy for the long haul. IBM is also a proven survivor with more than a century of successful operations under its belt. Recessions, world wars, technology sea changes -- none of these game-changing events have put a stop to the Armonk giant.
IBM is going through yet another strategy shift right now, abandoning its one-stop shop model for a tighter focus on selling high-margin software and services. It's a big change, and it's hurting revenues at the moment. But I also believe that it's exactly the right strategy if IBM wants to stay relevant across the next decade, which makes the drastic share price discounts look silly.
In other words, you can buy IBM shares right now to lock in today's attractive entry price and dividend yield. Warren Buffett is doing it, short-selling pessimists are backing off, and I frankly cannot come up with a good reason not to own IBM right now. That's especially true if you're looking for a long-term dividend play.
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