Alphabet‘s recent decision to issue a dividend reinforces a notable trend: the evolution of tech stocks as dividend payers. This is significant since many tech stocks tend to eschew dividends in favor of reinvesting for growth. It also confirms an impulse to offer payouts once they reach maturity.
Admittedly, Alphabet’s dividend return of 0.5% is too small for it to attract the attention of income investors. Nonetheless, some tech stocks have begun to offer cash returns significantly exceeding the S&P 500‘s 1.3% average. With a continuous commitment to innovation, income investors should take notice of the potentially lucrative and growing payouts in these three stocks.
International Business Machines
As one of the first tech companies to reach maturity, International Business Machines (NYSE: IBM) offered dividends to investors for decades. In April, it announced it would hike its payout to $6.68 per share annually. While that was an increase of just 0.6%, it marks the 29th consecutive year the dividend has increased.
Also, with a dividend yield of 4%, it has arguably become the dividend stock of the cloud. Arvind Krishna drove the 2019 acquisition of Red Hat, which placed IBM on the path to becoming a full-fledged cloud company.
That role in the cloud has also made it a player in the artificial intelligence (AI) field. This includes its team of consultants, 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 has risen since Krishna became CEO in April 2020, a dramatic turnaround for a stock that lost value in most of the 2010s.
While one cannot describe IBM as a “growth stock,” the revenue declines have largely reversed under Krishna’s leadership, and profits have increased.
Moreover, in the first quarter of 2024, the $12 billion in free cash flow for the trailing 12 months far exceeded the $6 billion in dividend cost during that time. This makes it likely that IBM will not only keep its payout, but also increase it on an annual basis.
Crown Castle
Crown Castle (NYSE: CCI) plays a largely unseen but critical role in the wireless industry. It specializes in “vertical real estate,” owning many of the towers that support the United States’ wireless infrastructure.
As a real estate investment trust (REIT), it pays at least 90% of its net income in dividends in exchange for an income tax exemption on its operational profits.
To that end, shareholders earn $6.26 per share annually on the payout, a 6% cash return. Although Crown Castle has not increased the dividend since late 2022, the yearly payout has risen every year since it initiated the dividend in 2014.
Admittedly, Crown Castle faces some uncertainty, including a recent CEO change. Steven Moskowitz took over as CEO after former CEO Jay Brown retired in January. Still, even his 25 years of industry experience does not guarantee his success as a leader.
Moreover, revenue declines occurred as some Sprint contracts continue to get canceled due to its takeover by T-Mobile US.
Despite challenges, funding the dividend has not been an issue. Over the trailing 12 months, the dividend cost the company about $2.7 billion. This is significantly below the $3.2 billion in adjusted funds from operations (AFFO) income that funds the payout. That increases the likelihood that it will hike the payout this year and maintain its streak of annual dividend increases.
Cisco Systems
Cisco Systems (NASDAQ: CSCO) is credited with building the internet in the 1990s and 2000s, and its hardware and software solutions continue to support the world’s technology infrastructure.
While it has become a slower-growth stock in recent years, it evolved into a notable dividend play. Its $1.60 per share in annual dividends yields about 3.2%. Even though the payout increased by less than 3% last year, it has risen every year since Cisco initiated the dividend in 2011.
Despite its dividend, the stock never recovered from the dot-com bust of the early 2000s as its switching and router business fell victim to falling demand and competition. More recently, it has become more of a software-as-a-service (SaaS) stock and recently acquired Splunk to increase its presence in cybersecurity. Still, it remains a mature, slower-growth business.
Despite its slowdown, Cisco generated nearly $14 billion in free cash flow over the trailing 12 months. This covered about $6.3 billion in dividend costs, increasing the likelihood that the payout hikes will continue. Although investors should not expect Cisco to become a high-flying tech stock again, it should remain an attractive option for investors seeking income.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Will Healy has no position in any of the 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 Dividend-Paying Tech Stocks to Buy in May was originally published by The Motley Fool
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