AlphabetThe recent decision to issue a dividend reinforces a notable trend: the evolution of technology stocks as dividend payers. This is significant as many tech stocks tend to avoid dividends and reinvest in growth. This also confirms the trend of offering payments once they reach maturity.
Certainly, Alphabet’s dividend yield of 0.5% is too low to attract the attention of income investors. Nonetheless, some technology stocks have begun to offer cash returns well in excess of S&P500This is an average of 1.3%. With a continued commitment to innovation, income investors should take note of the potentially lucrative and growing payouts from these three stocks.
International Business Machines
As one of the first technology companies to reach maturity, International Business Machines (NYSE:IBM) has delivered dividends to investors for decades. In April, it announced it would increase its payout to $6.68 per share per year. Although this is an increase of only 0.6%, it is the 29th consecutive year that the dividend has increased.
Plus, with a 4% dividend yield, it has arguably become the cloud’s dividend stock. Arvind Krishna led the acquisition of Red Hat in 2019, which put IBM on the path to becoming a full-fledged cloud company.
This role in the cloud has also made it a player in the field of artificial intelligence (AI). This includes its consulting team, IBM Research and IBM Watsonx. Watsonx is a business application that includes AI modeling, storage, and governance tools.
Additionally, the company’s shares have risen since Krishna became CEO in April 2020, a dramatic turnaround for a stock that lost value for most of the 2010s.
Although IBM cannot be described as a “growth stock,” revenue declines have largely reversed under Krishna’s leadership and profits have increased.
Additionally, in the first quarter of 2024, the $12 billion in trailing 12-month free cash flow far exceeded the $6 billion in dividend cost during that period. It is therefore likely that IBM will not only retain its payment, but also increase it on an annual basis.
Crown Castle
Crown Castle (NYSE:CCI) plays a largely invisible but essential role in the wireless industry. It specializes in “vertical real estate,” owning numerous towers that support the United States’ wireless infrastructure.
As a real estate investment trust (REIT), it pays out at least 90% of its net income as dividends in exchange for being tax-free on its operating profits.
To this end, shareholders earn $6.26 per share each year on the payout, or a 6% cash yield. Although Crown Castle has not increased the dividend since late 2022, the annual payout has increased every year since the dividend was launched in 2014.
To be sure, Crown Castle faces some uncertainty, including a recent CEO change. Steven Moskowitz took over as CEO following the retirement of former CEO Jay Brown in January. Yet even his 25 years of experience in the industry do not guarantee his success as a leader.
Additionally, revenue declines have occurred as some of Sprint’s contracts continue to be canceled due to its acquisition by T-Mobile United States.
Despite the difficulties, financing the dividend did not pose a problem. Over the past 12 months, the dividend has cost the company approximately $2.7 billion. This figure is significantly lower than the $3.2 billion in adjusted operating revenue (AFFO) that funds the payment. This increases the likelihood that it will increase the dividend 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.
Although it has become a slower-growing stock in recent years, it has become 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 increased every year since Cisco started the dividend in 2011.
Despite its dividend, the stock never recovered from the Internet industry collapse of the early 2000s, as its switching and router businesses 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 the cybersecurity space. However, it is a mature and slower growing business.
Despite its slowdown, Cisco generated nearly $14 billion in free cash flow over the past 12 months. That covered about $6.3 billion in dividend costs, increasing the likelihood that distribution increases will continue. While investors shouldn’t expect Cisco to become a high-flying tech stock again, it should remain an attractive option for investors looking for 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 holds positions 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