Most investors think that the technology sector is only filled with growth stocks. While that association makes sense, there are a handful of tech stocks out there that offer investors a generous yield.
Which tech stocks in particular? We asked a team of Motley Fool contributors to highlight a tech stock that sports a meaty yield. Here's why they called out International Business Machines (NYSE: IBM), Digital Realty Trust (NYSE: DLR), and Crown Castle International (NYSE: CCI).
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Tim Green (International Business Machines): The market doesn't like IBM. The stock is trading right around its 52-week low, despite clear signs that the company's multi-year transformation is taking hold. Revenue has now grown for three straight quarters, driven by the strongest mainframe product cycle in years and continued growth of the cloud computing business. And the company has been signing large, multi-technology deals that demonstrate the advantages of long-standing relationships and a broad portfolio of products and services.
While this beaten-down stock price is no doubt frustrating for investors, it's a godsend for those looking for high-yield tech stocks. Thanks to the poor stock performance and 23 consecutive years of dividend increases, shares of IBM now yield about 4.4%. That's close to its highest yield in two decades, and it beats the pants off IBM's big-tech peers.
IBM's high yield looks relatively safe as well. Based on the company's outlook for adjusted earnings this year, the dividend payout ratio currently sits at about 46%. It would take a disaster, as IBM experienced in the early 1990s, for the dividend to be at risk. Not impossible, but also not likely.
I don't think the market is giving IBM enough credit, or any credit really, for its turnaround. The stock trades for barely more than 10 times earnings, far below the broader market, and its dividend yield is more than twice that of the S&P 500. I think the market will eventually come to its senses. But until it does, investors should take advantage and buy this high-yield tech stock.
Riding the wave of cloud computing
Danny Vena (Digital Realty Trust): It might seem like the terms "tech" and "high-yield" are tantamount to oil and water -- never the two shall meet. That's a reasonable observation for tech companies, as it can be difficult to find that right combination of income and growth potential, while still offering some measure of stability.
Tech investors do themselves a disservice by ignoring real estate investment trusts (REIT), a group of companies that receive special tax treatment because they're required to pay out at least 90% of their income as dividends.
One such REIT is Digital Realty Trust and data centers are the company's stock-in-trade. If you think of them as merely giant warehouses, think again. These buildings house massive server farms and the required networking equipment that makes cloud computing possible. These facilities require highly reliable and secure environments and redundant backup systems for the cooling, mechanical, and electrical systems that prevent the loss of data stored on these giant cloud computers.
The extensive use of social media, streaming video and music, and cloud adoption is driving the increasing need for data centers -- and demand in the industry is expected to double by 2021. When you factor in the massive amounts of data generated by self-driving cars, the Internet of Things, and artificial intelligence, it's easy to understand why the need for data centers is accelerating.
With over 200 facilities across the globe, Digital Realty is well positioned to meet this growing demand. The company hosts data centers in 12 countries and 32 metropolitan areas, with 32 million rentable square feet. Its contracts contain built-in annual rent increases of between 2% and 4%, and users are locked in for the long haul, with an average of nearly five years remaining on its existing leases.
Digital Realty Trust's FFO (funds from operations, the REIT measure for earnings) has increased by 12.3% on average, in each of the past 12 years -- with dividend increases to match and a current yield of 3.3%.
With built-in growth, a generous yield, and increasing demand for its services, Digital Realty checks all the boxes.
A winner in the eventual 5G rollout
Brian Feroldi (Crown Castle International): The biggest event happening in the telecom industry right now is the pending merger between Sprint and T-Mobile. If approved, this deal promises to shake-up the U.S. telecom industry like never before. In an effort to get the green light, the two companies have promised to invest heavily to build out their 5G capabilities and usher in a new age of communication in the country.
While the deal going through is far from certain, what is certain is that 5G will eventually be rolled out nationwide by the country's biggest wireless carriers. The reason is that 5G will be multiple times faster than current technology, which is a huge benefit to consumers and businesses alike.
The race to roll out 5G services nationwide should prove to be a windfall for tower operators like Crown Castle International. Crown Castle owns a vast network of more than 40,000 cell towers, 60,000 small cell towers, and 60,000 miles of fiber optic cable that are spread strategically around the U.S. The company rents out space on its assets to carriers who want help blanketing the country with coverage. Large carriers are happy to partner with companies like Crown Castle because it is much easier for them to rent space on these assets instead of having to build and maintain them.
With billions of devices set to come online over the next couple of years, Crown Castle should benefit from steadily rising demand. When combined with margin improvements, new asset deployments, and occasional acquisitions, the company looks poised to deliver double-digit profit growth for the foreseeable future. Adding in a dividend yield of 3.8% to the picture acts as icing on the cake.
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Brian Feroldi has the following options: short January 2019 $185 puts on IBM, short January 2019 $180 puts on IBM, long January 2020 $170 calls on IBM, and short January 2020 $170 puts on IBM. Danny Vena has the following options: long January 2019 $165 calls on IBM. Timothy Green owns shares of IBM. The Motley Fool recommends Crown Castle International and T-Mobile US. The Motley Fool has a disclosure policy.