When investors are looking for dividend stocks to buy, they may not immediately think of technology stocks. After all, that group is generally associated with higher-risk stocks that may not even be profitable, let alone pay a dividend.
However, there are some names in the sector that are not only dividend stocks, but reliable, high-yield dividend stocks. This is especially true given the massive selloff in the broader market in 2022, pushing many dividend stocks into high-yield territory.
Let’s take a look at three technology stocks that all have at least a 5% yield, that we like today for income investors.
Chips on the Table
Our first stock is Intel Corp. (INTC) , which is a diversified technology company that makes hardware components for computers such as chipsets, CPUs, boards, graphics products, memory products, and more. It also counts Mobileye among its segments, a company that is heavily involved in the autonomous driving push. This unit is said to be on the block for a spinoff via an IPO from Intel in 2023.
Intel was founded in 1968, making it one of the older technology stocks in the market today. It produces about $66 billion in annual revenue, and its market cap is $107 billion.
While Intel is not what we’d characterize as a high-growth stock, it has managed an impressive eight consecutive years of earnings growth. However, this year’s earnings are slated to be much lower than 2021, so that streak looks set to end. Going forward, we expect Intel to grow earnings from 2022 levels at an average of 5% per year, driven by small revenue increases, as well as a modest buyback program.
Intel has raised its dividend for eight consecutive years as well, with the payout growing from $0.90 per share annually to $1.46 per share over that period. The stock has also performed very poorly this year, so the combination of the higher payout and much lower share price has the current yield at 5.5%. That sort of yield is generally reserved for real estate or utility stocks, but Intel offers what should be better growth prospects, as well as the ability to raise the dividend for years to come.
The payout ratio is just over half of earnings for this year, meaning the dividend should be quite safe, even with lower earnings in 2022. With earnings growth at 5% going forward, Intel would be able to raise its dividend indefinitely. Coupled with the fact the yield is over 5%, Intel is a high-quality income stock.
Finally, the stock trades at just over 10 times this year’s expected earnings, meaning it is well below our estimate of fair value at 12 times earnings. That should provide a tailwind for shareholders, in addition to the 5% growth rate and 5.5% yield, making shares a buy.
Opening the ‘Gates’ to Dividends
Our next stock is Seagate Technology (STX) , which is a company that makes data storage and related products globally. The company provides a wide variety of storage products such as hard drives, solid state drives, video and image hard disk drives, and external storage products. It is one of the larger players in the space, but the sector is also highly competitive.
The company was founded in 1978, and today, makes about $9.3 billion in annual revenue and trades with a market cap of $10.7 billion.
Given demand for storage products tends to be lumpy, Seagate has generally gone through boom and bust cycles when it comes to earnings. Some years it produces outstanding growth, and other years, earnings decline markedly. Last year was a record for the company in terms of earnings, and we expect a meaningful downturn in earnings for the current fiscal year as demand slows.
However, we do see 3% long-term earnings growth on the horizon, particularly if the current year’s earnings come in weaker than expected.
Seagate’s current dividend streak is just three years, but we note that the payout has doubled in the past decade. There were years of pauses in the dividend, but no cuts, which we believe is an important distinction.
In addition, the current yield is 5.3%, which is the combination of a lower share price in 2022 and higher dividend payment. We currently estimate the payout ratio to be about 40% for this year, so Seagate could suffer a sizable drop in earnings and still comfortably afford the dividend to shareholders.
The stock is trading at just over 11 times earnings expected for this year, and we set fair value at 10 times earnings. It is therefore somewhat overvalued, offsetting the projected earnings growth rate of 3%, but for income investors, it still yields well over 5%.
Big Blue, Big Yield
Our final stock is IBM (IBM) , a diversified technology conglomerate that operates through four segments: Software, Consulting, Infrastructure, and Financing. Through these segments, IBM provides a wide variety of software products, on-premises and cloud-based server and storage solutions, leasing and installment payment financing, working capital solutions, and more.
IBM was founded in 1911, and today produces about $60 billion in annual revenue, while trading with a market cap of $108 billion.
IBM has seen earnings decline for the past two years, but we see this year as producing higher earnings for the first time since 2019. We think IBM’s growth prospects are relatively modest, and expect to see an average growth rate of 4% moving forward.
IBM’s dividend streak is much longer than the other two stocks mentioned here, at 27 years. The combination of two years of earnings declines and a rising dividend means the payout ratio is more elevated, and stands at 67% today. Still, with projected earnings growth looking forward, we think the dividend is plenty safe.
The yield today is 5.4%, which is even better given the nearly three decades of dividend increases the company has produced, and the relative safety of the payout.
The stock trades just over 13 times this year’s expected earnings, which is slightly above our estimate of fair value at 12 times. Still, with the 4% projected growth rate and 5.3% yield, IBM is a strong choice for income investors.
While technology stocks aren’t necessarily the first place to go for income, there are some hidden gems in the space. We like Intel, Seagate, and IBM for their 5%+ yields, as well as their relatively modest payout ratios. They offer varying levels of growth and valuation, and we like all three as income stock choices today.
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