Alphabet's recent decision to issue a dividend reinforces a notable trend: the evolution of tech stocks as dividend payers. This is important because many tech stocks tend to forego dividends in favor of reinvesting for growth. It also confirms that there is an urge to pay when maturity is reached.
Admittedly, Alphabet's 0.5% dividend yield is too small to attract the attention of income investors. Nevertheless, some tech stocks are starting to offer cash returns that are significantly higher than the S&P 500's 1.3% average. With a continued commitment to innovation, income investors should take note of the potentially lucrative and growing dividends of these three stocks.
international business machine
As one of the first technology companies to reach maturity, International Business Machines (NYSE: IBM) has been providing dividends to investors for decades. In April, the company announced that it would raise its annual dividend to $6.68 per share. Although the increase is only 0.6%, it marks the 29th consecutive year of dividend increases.
Also, with a dividend yield of 4%, there is no doubt that it has become a cloud dividend stock. Arvind Krishna drove his Red Hat acquisition in 2019, putting IBM on the path to becoming a full-fledged cloud company.
Its role in the cloud also puts the company in the artificial intelligence (AI) space. This includes the company's consultant team, IBM Research, and IBM watsonx. Watsonx is a business application that includes tools for model creation, storage, and AI governance.
Additionally, the company's stock price has risen since Mr. Krishna took over as CEO in April 2020, a dramatic turnaround for a stock that had lost value for most of the 2010s.
IBM cannot be called a “growth stock,'' but under Mr. Krishna's leadership, revenue declines have largely been reversed and profits have increased.
Additionally, in the first quarter of 2024, it generated free cash flow of $12 billion over the subsequent 12 months, far exceeding its dividend cost of $6 billion over the period. Because of this, IBM is likely to not only maintain its dividend, but increase it every year.
crown castle
Crown Castle (NYSE: CCI) plays a largely invisible but important role in the wireless industry. The company specializes in “vertical real estate,” and owns many of the towers that support America's wireless infrastructure.
As a real estate investment trust (REIT), it pays out at least 90% of its net income as dividends in exchange for income tax exemption on operating profits.
To this end, shareholders earn $6.26 per share annually in dividends, which is a 6% cash return. Crown Castle hasn't increased its dividend since the end of 2022, but its annual dividend has increased every year since it began paying dividends in 2014.
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To be sure, Crown Castle faces some uncertainties, including a recent CEO change. Stephen Moskowitz took over as CEO after former CEO Jay Brown stepped down in January. Still, even his 25 years of industry experience do not guarantee his success as a leader.
In addition, revenue declines occurred as some Sprint contracts continued to be canceled due to the acquisition by T-Mobile US.
Although there are challenges, raising dividends has not been an issue. Over the subsequent 12 months, dividend losses amounted to approximately $2.7 billion. This is significantly lower than the $3.2 billion in adjusted operating funds (AFFO) income that funds the payments. This increases the likelihood that the company will raise its dividend this year and maintain its streak of dividend increases.
Cisco Systems
Cisco Systems (NASDAQ: CSCO) is known for building the Internet in the 1990s and 2000s, and its hardware and software solutions continue to support the world's technology infrastructure.
Although growth has slowed in recent years, it has evolved into a noteworthy dividend strategy. The annual dividend is $1.60 per share, giving a yield of approximately 3.2%. Last year's dividend increase was less than 3%, but it has increased every year since Cisco started paying his dividend in 2011.
Despite the dividend, the stock never recovered from the dot-com bust of the early 2000s, as its switching and router businesses fell victim to weak demand and competition. Recently, the company has become more of a SaaS (Software-as-a-Service) stock, and recently acquired Splunk to increase its presence in the cybersecurity field. Still, it remains a mature, slow-growing business.
Despite the economic slowdown, Cisco generated approximately $14 billion of free cash flow in the subsequent 12 months. This covered approximately $6.3 billion in dividend costs and increased the likelihood that the dividend would continue to increase. Investors shouldn't expect Cisco to become another high-flying tech stock, but it should remain an attractive option for income-seeking investors.
Should you invest $1,000 in International Business Machines right now?
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Suzanne Frey, an Alphabet executive, is a member of the Motley Fool's board of directors. Will Healy has no position in any stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Cisco Systems, and Crown Castle. The Motley Fool recommends International Business Machines and T-Mobile US. The Motley Fool has a disclosure policy.
3 High Dividend Tech Stocks to Buy in May originally published by The Motley Fool
