Income investors typically focus on industries that have a wide range of high-yielding equities to choose from. These industries include the energy space, utilities, consumer staples, etc. In these areas, companies often generate sizeable cash flows, and their need to invest massively in their businesses is not too large, which allows for substantial payouts to investors. However, on occasion other industries offer excellent opportunities. In this article, we discuss three high-yielding tech stocks.
On the other hand, technology is a high-growth industry where many companies focus on reinvesting the majority or even all of the cash flows to grow the company further. That’s why many technology stocks offer no dividend payments or only small ones. These stocks even include the largest companies in this space, such as Apple (AAPL) and Microsoft (MSFT), which offer sub-1% dividend yields.
Some tech stocks are outliers, however. This article will highlight three technology companies that could be attractive to income investors due to their high dividend yields.
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3 High-Yielding Tech Stocks
International Business Machines (IBM) is a tech company that has been around for a very long time and is the first high-yielding tech stock on this list. Formerly IBM was one of the largest tech companies in the world; it has been overtaken by some higher-growth companies, including the aforementioned Apple and Microsoft stocks.
That being said, IBM is still a large company that is active around the globe. Its core businesses are in the software and services areas, mainly with a business-to-business approach. IBM has gotten rid of most of its hardware businesses over the decades. It saw software and services as more promising due to higher margins and lower capital intensity. In addition, IBM has done a range of acquisitions to foster its business in areas such as cloud computing, artificial intelligence, etc.
The company is forecasted to see its earnings per share grow meaningfully this year to around $9.80, which means that IBM is currently valued at only 13X this year’s expected net profit. This number is below-average valuation, which could make for some multiple expansion upside over the coming years.
At the same time, the below-average valuation makes for an above-average income yield: IBM is currently trading with a dividend yield of 5.3%, which is quite attractive. Not too much is required regarding share price expansion to allow for an annual return in the 8% – 10% range. Since IBM has raised its dividend for 27 years in a row making the stock a Dividend Aristocrat and Dividend Champion. Investors can expect their income to continue to grow over the coming years, although most likely not at an overly large pace. Still, thanks to a high starting yield, IBM looks like an above-average income play in the tech space.
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Intel (INTC) is one of the largest chip companies in the world in terms of revenue and profit generation. The company had been the clear leader in the past, although its position has come under some pressure in recent years.
Management mistakes and technological missteps have allowed competitors such as Advanced Micro Devices (AMD) and NVIDIA (NVDA) to gain market share in the data center business, which has led to some margin pressure on Intel. At the same time, Intel’s strategy of building out its own foundry business (producing chips for other companies that don’t operate their own fabs) requires heavy investments in the near term.
Ultimately, those investments could pay off, however. Once these fabs are finished and start contributing profit, Intel’s earnings and cash flows should improve meaningfully. In addition, TSMC (TSM) shows that the foundry business can be highly attractive and very profitable.
Intel is doing a lot to right the ship and correct past mistakes, but for now, the market is not appreciating those efforts. That’s why Intel’s shares are trading at a low price right now, which has allowed the dividend yield to climb to 5.0%. That’s the highest yield Intel has traded at in an extended period. Moreover, based on current earnings estimates, Intel is paying out a little more than 60% of its profits in dividends this year. That’s not especially low, but the dividend looks sustainable, nevertheless.
Since Intel is trading at only 12X net profits right now, investors could benefit from share price appreciation in the coming years, especially if the turnaround is successful and Intel manages to grow its earnings again.
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3: HP Inc.
HP Inc. (HPQ) is a leading hardware manufacturer centered on its printer business and personal systems: computers, mobile devices, etc. The industries HP is active in aren’t growing overly fast, but HP is well-positioned in them and holds a considerable market share. In addition, HP generates strong cash flows from its low-growth business, and since it does not need to reinvest heavily into the business, it can return large sums of cash to the company’s owners.
HP has done so via a combination of dividends and share repurchases in the past. Since 2016, HP has repurchased around 40% of its shares, contributing heavily to its compelling earnings-per-share increase of well above 100% over that time frame. Thus even a low business growth rate can translate into attractive earnings-per-share growth when management makes the right capital allocation decisions.
This point was not unnoticed by value investors, which is why Buffett’s Berkshire Hathaway (BRK.A)(BRK.B) bought a stake in the company not too long ago — which is a crucial endorsement for value investors around the globe.
The company is currently trading with a solid dividend yield of 3.7%, less than what IBM and Intel offer but still more than twice the broad market’s dividend yield. On top of that, HP has raised its dividend at a highly compelling pace over the last couple of years, as the current dividend is roughly twice as high as it was five years ago.
HP is trading with an earnings multiple of just 6.6X right now, which translates into an earnings yield of more than 15%. Moreover, the market is pricing HP for a steep business downturn even before that has materialized, which could provide a chance to load up on shares cheaply. Between its dividend yield, some earnings growth potential, and multiple expansion tailwinds, HP has the opportunity to deliver 10%+ annual returns going forward, we believe, potentially making it a valuable total return pick with a compelling dividend yield at current prices.
Final Thoughts on 3 High-Yielding Tech Stocks
High-yielding tech stocks are a rarity. In many cases, the free cash flow (FCF) is used for acquisitions or share buybacks. Today, International Business Machines, Intel, and Hewlett-Packard give dividend growth investors an opportunity to diversify their portfolios at reasonable valuations.
Disclosure: Members of the Sure Dividend Team are long IBM, INTC, and HPQ.
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Jonathons Weber writes about value, dividend Investing, growth, and growth at a reasonable price equities. He writes extensively on Seeking Alpha and is also a member of the Sure Dividend team. According to TipRanks, Jonathan is among the top 1% of bloggers (as of July 24, 2022).