The tech sector is fertile ground for growth and innovation. Besides, technology can be a remarkably profitable business, and many companies in the industry are generating massive amounts of free cash flow, allowing them to reward investors with generous dividend payments over the years. With this in mind, it makes a lot of sense to go hunting for attractive dividend stocks in the tech industry.
Here are three giants in tech that several of our contributors think are ideal for dividend investors, but for different reasons. Let's take a look at which companies, and why they should be on dividend investors' radar.
Andres Cardenal, IBM (IBM 1.25%): IBM is arguably one of the most sound and respectable names in the tech industry; an old corporate cliche is that "nobody ever got fired for buying IBM." The company has a sizable presence and a long-standing track record in areas such as enterprise software, IT services, and hardware, among other things. IBM's ability to provide integral solutions for customers across multiple areas is a major competitive strength for the company.
The industry is always changing, and this can be a permanent challenge for IBM. However, Big Blue has proven its ability to leverage its strengths in order to adapt to new industry trends and evolving demands from its customers through the decades. Besides, the company has a time-proven trajectory of dividend payments.
IBM has paid uninterrupted dividends in each year since 1916, and it has increased payments during the last 20 consecutive years. The business produced $4.5 billion in free cash flow in the first half of 2015, while dividends consumed only $2.4 billion of that money, so IBM has plenty of financial flexibility to continue increasing distributions in the future.
At current prices, IBM stock pays a respectable dividend yield in the area of 3.6%. This is not exceptionally high, but it's not bad at all coming from such a solid tech powerhouse with plenty of room for dividend growth.
Tim Green, Cisco (CSCO 0.19%): Networking giant Cisco only started paying a dividend in 2011, but during the past few years, that dividend has been increased substantially. Cisco stock now yields about 3.25%, giving it a higher yield than many of its tech peers. With room to grow the dividend further in the future, Cisco should be on the radar of every dividend investor.
Cisco is the dominant player in the networking hardware industry, with its share of the switching and routing markets dwarfing those of its nearest competitors. This dominance allows Cisco to generate an enormous amount of free cash flow, to the tune of $11.3 billion during fiscal 2015. Based on its most recent dividend payment, Cisco will pay out about $4.3 billion in dividends during the next year, putting the payout ratio based on free cash flow at roughly 38%.
This leaves room for Cisco to grow the dividend at a faster rate than earnings during the next few years. Cisco is certainly facing its fair share of long-term challenges, from falling sales in certain International markets like China to large cloud companies building their own networking hardware. So far, though, the promise of software-defined-networking, where cheap hardware is paired with software, has failed to truly disrupt Cisco's business, a sign that Cisco's competitive advantages remain intact.
For dividend investors, a near-zero chance of a dividend cut in the future is an important attribute for any dividend stock to have. Cisco fits the bill.
Steve Symington, NVIDIA Corporation (NVDA -0.01%): NVIDIA may not be the first dividend-paying tech stock that comes to most investors' minds. But as a shareholder myself for more than five years, I'm still convinced the cash-rich graphics chip specialist strikes an attractive balance between potential share price appreciation and generous capital returns to investors. In fact, I was elated when NVIDIA initiated its first quarterly dividend at $0.075 in late 2012, which would serve to complement its pattern of returning billions to investors in the form of share repurchases in subsequent years. Since then, the company has increased its quarterly payout twice to reach its current level of $0.0975 per share, equating to a modest annual yield of roughly 1.73%.
Most recently, NVIDIA stock surged 12.7% last month, as strength in gaming GPU sales drove a strong second quarter, helping NVIDIA stock buck the broader market's declines. NVIDIA has also returned a total of $551 million to shareholders so far in 2015 in buybacks and dividends, including $400 million as part of an accelerated repurchase agreement in the second quarter.
Meanwhile, NVIDIA generated free cash flow of $139 million last quarter, and ended the period with a whopping $4.5 billion in cash and $1.4 billion in debt on its balance sheet. This leaves it plenty of flexibility to continue investing in various growth initiatives, while maintaining its capital returns.
Finally, add in the possibility of a fresh revenue stream from IP licensing if NVIDIA proves successful in pending patent litigation against Samsung and Qualcomm, and it should come as no surprise that I'm perfectly content holding onto my shares for the foreseeable future.