After all, technology is a rapidly changing industry.
But times have changed. In the post-Great Recession era of volatile stock markets and low interest rates, investors increasingly demand dividend payouts, even among tech companies. The rationale makes sense. Large tech companies have tens of billions of dollars in cash on their balance sheets, with low debt, and they generate huge amounts of free cash flow.
These qualities make the tech sector a surprising haven for income investors. Here are three tech stocks that pay attractive 3% dividends, have healthy balance sheets and grow their dividends each year.
International Business Machines (NYSE:IBM)
IBM has struggled for several years, as the company is in the middle of a prolonged and difficult turnaround. This was out of necessity, as IBM’s legacy hardware businesses were becoming relics. As a result, IBM has invested significantly in new business areas like the cloud, mobile and big data.
Last quarter, IBM’s operating earnings per share fell 23%, and its revenue declined for the 17thconsecutive quarter. This certainly looks bleak, but IBM’s investments are finally starting to bear fruit.
Excluding the impact of the strong U.S. dollar, IBM’s revenue declined a modest 2% in the first six months of 2016. IBM’s cloud revenue soared 30% last quarter. Mobile and security revenue rose 43% and 18%, respectively.
The broader takeaway is that IBM’s strategic imperatives collectively grew revenue by 12% last quarter, and now comprise nearly 40% of IBM’s total revenue.
There is a good chance IBM will return to revenue growth over the next quarter or two, and in the meantime, the company generates huge amounts of free cash flow and rewards shareholders with a growing dividend.
IBM generated $13.1 billion of free cash flow in the last four quarters. Over the past year, it returned $9.2 billion of cash to shareholders, and the company holds $10.6 billion of cash which can be used to invest in future growth and continue to grow dividends.
In April, IBM raised its dividend by 7.7%, and has increased its dividend for 21 years in a row. Going back further, IBM has paid a dividend to shareholders each year since 1916. The stock currently offers a hefty 3.5% dividend yield.
Cisco Systems (NASDAQ:CSCO)
Cisco is one of the most shareholder-friendly companies in the tech sector. It returns huge amounts of cash each year, thanks to its excellent balance sheet.
Cisco provided investors with an impressive 24% dividend increase this year and at the same time announced a $15 billion stock repurchase plan. Cisco stock offers a solid 3.3% dividend yield.
The reason why Cisco is such a strong dividend growth stock is because it generates massive cash flow, and with little debt to worry about, all this cash flow is piling up on the balance sheet.
Cisco generated $13.5 billion of operating cash flow in fiscal 2016. Its capital expenditures amounted to just $1.1 billion for the year.
Consequently, the company’s free cash flow came in at a whopping $12.4 billion for the fiscal year.
Cisco ended last quarter with $65 billion in cash, cash equivalents and marketable securities on its balance sheet, compared with just $25 billion in current liabilities.
Cisco’s earnings per share increased 21% last fiscal year, driven by growth in new markets. Revenue increased 5% in fiscal 2016 in the Asia-Pacific region, Japan and China.
Like IBM, Intel is in a turnaround of its own. The decline in the personal computer industry has weighed on Intel. PC shipments are falling around the world, as a greater amount of computing is being done on smartphones and tablets.
Intel’s Client Computing group, which includes its core PC business, posted a 0.5% decline in revenue in the first six months of the year. The continued decline is disappointing, but it is at least a good sign that the decline on the PC side of the business is moderating—revenue there declined 8% last year.
And, the company is hoping its investments in data centers and the Internet of Things, or IoT, will be its major growth catalysts. Last quarter, revenue in data centers and the Internet of Things increased 4% and 2%, respectively. Last year, Intel grew data center revenue by 11% and IoT revenue by 7%.
In addition, Intel has more than $17 billion in cash and marketable securities on its balance sheet, which can be used to invest further in the company’s core growth initiatives.
Despite Intel’s growth struggles, it’s notable for delivering those tech stock dividends. Intel is still highly profitable and rewards shareholders with a 3% dividend yield.
Disclosure: The author is personally long IBM.
This article is brought to you courtesy of Wyatt Investment Research.