3 Low-Risk Tech Stocks for Dividend Investors

Not all tech stocks are fraught with risk.

Joe Tenebruso
Joe Tenebruso
Aug 17, 2015 at 12:00PM
Technology and Telecom

Technological shifts can bring rapid disruption, obliterating business models and wiping out fortunes along the way. The technology sector, therefore, is not typically an area where investors search for low-risk dividend stocks. However, there are some companies that have successfully navigated this dynamic environment for decades and will probably continue to do so for many years to come.

The innovator
Maybe no company has revolutionized as many industries as Apple (NASDAQ:AAPL). The tech titan helped usher in the era of digital music, smartphones, and tablet-based computing. Now Apple is striving to do the same with mobile payments, smartwatches, and connected cars and homes. Innovation is ingrained in the core of Apple's culture, and it's allowed the company to adapt to changing trends and remain on the forefront of technology. Skeptics who view Apple as a high-risk investment often dismiss this important aspect of Apple's competitive advantage, to their own detriment.

Further reducing Apple's risk profile is its massive hoard or more than $200 billion in cash and investments. Combined with over $60 billion in annualized free cash flow, this gives Apple an incredible amount of ammunition to devote to research and development, as well as the acquisition of innovative new technologies. In turn, Apple is able to stay a step ahead of the competition, or even buy the competition outright.

Moreover, Apple's tremendous cash flow generation and fortress-like balance sheet give it the ability to return massive amounts capital to its shareholders in the form of stock repurchases and steadily rising dividends -- both of which help to support its share price.

I'd also argue that Apple's shares are well within value territory, with a trailing-12-month price-to-earnings ratio of 13 and forward P/E -- based on analysts' earnings estimates for 2016 -- of less than 12. That's compared to the S&P 500's current TTM P/E of 21 and forward P/E of 17. 

All told, Apple offers investors a proven culture of innovation, massive cash flows and reserves, rising dividends, value-creating share repurchases, and a value-priced stock. That's a powerful formula for excellent risk-adjusted returns. And it's a combination that few companies posses to the same degree as Apple.

The telecom titans 
Two other low-risk tech stocks can be found in Verizon (NYSE:VZ) and AT&T (NYSE:T). The telecom behemoths provide services that have become a necessity for tens of millions of people, as they power Apple's popular devices as well as those of its competitors. And with the trend toward smartphones and mobile computing likely to fuel increased data usage in the years ahead, the wireless services that Verizon and AT&T provide should continue to grow in importance.

As the two largest wireless service providers in the U.S., Verizon and AT&T operate in what has become, in many ways, a duopoly. While other, smaller competitors exist, Verizon and AT&T combine to control two-thirds of wireless subscriptions in the U.S. Furthermore, their market shares have remained fairly steady over the past half-decade, with each controlling about a third of the market.

Statistic: Market share of wireless subscriptions held by carriers in the U.S. from 1st quarter 2011 to 2nd quarter 2015 | Statista
Find more statistics at Statista.

Helping to preserve those leading market shares are industry low churn rates; in the most-recent quarter, Verizon's retail postpaid churn rate of 0.90% was the lowest in three years, and AT&T's wireless churn rate checked in at an also very respectable 1.01%. It appears that Verizon and AT&T's claims of owning the highest-quality nationwide networks have resonated with consumers who have been reluctant to switch to rival carriers even in light their intense promotional campaigns.

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These steady subscription renewal rates have led to stable cash flows, which in turn have led to steady stock prices for these telecom giants. Verizon's beta of 0.62 and AT&T's even lower beta of 0.53 demonstrate their lack of volatility relative to the S&P 500. While risk and volatility are two very different things, a less-volatile stock price can offer additional comfort to investors who don't enjoy seeing wild swings in the prices of their stocks.

Maybe best of all, Verizon's and AT&T's dividends, at 4.6% and 5.6%, respectively, offer investors sizable yields, particularly in today's low-interest rate environment. While these dividends are unlikely to grow rapidly from this point forward, they are well supported by the telecoms' ample cash flows. And thanks to Verizon's and AT&T's pricing power, they should also be able to keep pace with inflation, thereby helping to protect your capital and maintain your purchasing power in the years ahead.