If you like tech stocks but you're an investor who wants a portfolio that also generates income, then you're going to narrow your stock search to companies that pay dividends. While many tech stocks don't offer large dividends, there are some out there that do. To that end, I've identified three stocks that meet the following two criteria:
- The company offers a dividend yield of at least 3%.
- Current dividend payouts are supported by the company's free cash flow generation. (In other words, the stock is not a "yield trap.")
The three stocks I've chosen are Broadcom (NASDAQ: AVGO), IBM (NYSE: IBM), and HP Inc (NYSE: HPQ).
Image source: IBM.
Broadcom is one of the best-run semiconductor companies in the world. Led by CEO Hock Tan, the company has amassed a collection of technology franchises that are best-in-class and allow it to both deliver solid revenue growth and churn out incredible profitability. (I say "technology" because Broadcom has gone from being a pure semiconductor company to one that also offers software through its recent acquisitions of Brocade and CA Technologies.)
You don't necessarily need to know the ins and outs of Broadcom's business portfolios to understand why it's a solid dividend-paying tech stock. What you do need to know is that the company has delivered robust free cash flow growth for years on end, and that growth has translated into a solid and rapidly growing dividend -- the shares currently offer a dividend yield of 3.45% -- because the company's policy is to give back half of the free cash flow that it generated in the prior year in the form of a dividend in the current year.
Broadcom is a company that investors can count on to deliver solid free cash flow growth over the long term and share its success with its stockholders.
IBM isn't the sexiest tech stock on the planet. The company's recent performance has been characterized by revenue declines and a share price that's materially lower today than it was five years ago.
Nevertheless, IBM is a company that still generates a massive amount of free cash flow, and, thanks to substantial share repurchase activity over the years, is able to split that free cash flow among fewer shares than it would otherwise have. As of this writing, IBM shares offer a dividend yield of about 4.39%. Moreover, since IBM has a solid track record of annual dividend increases, shareholders should expect one the next time the company declares a dividend -- this will likely happen later this month.
It's also worth noting that IBM isn't stretching itself too thin to pay its current dividend. Over the past 12 months, the company raked in a whopping $12.31 in free cash flow per share -- just shy of twice what it needs to cover its current dividend. This means that even if IBM's free cash flow generation were to remain flat for the foreseeable future (IBM is guiding to free cash flow of $12 billion in 2019 -- up slightly from $11.9 billion in 2018, though down from around $13 billion in 2017), it would be able to keep boosting its dividend for a while. IBM does need to get on a sustainable growth track, however, for its stock price to start delivering better returns.
3. HP Inc
One stock that seems to be out of favor right now is HP Inc, which is well known as a leading maker of PCs and printers. HP investors were shaken in its most recent quarter when the company reported weaker-than-expected results in its printing segment, driven by worse-than-expected sales of its printing supplies. HP's print business essentially operates on a razor-and-blade model and, in this case, sales of the blades (printing supplies) fell short, especially in the EMEA region. The shortfall, per CEO Dion Weisler, was due primarily to market share loss.
Time will tell whether the company's efforts to regain market share in printing supplies works out -- if it does, it could go a long way toward countering the current bear thesis on the stock. But the sell-off in the shares has potentially created an opportunity for yield-oriented investors. As of this writing, HP's shares offer a dividend yield of 3.21%. The dividend is backed by a company that raked in $2.36 per share in free cash flow over the last twelve months -- more than enough to cover its annualized dividend three times over.
HP is also a company that has shown a strong commitment to its dividend, raising it each year that it has been a stand-alone entity. (HP Inc was formed from the splitting of Hewlett-Packard into two companies: HP Inc and Hewlett-Packard Enterprise.)
All three of these stocks offer dividend yields in excess of 3%, and all of them are likely to continue to raise their dividends in the years ahead. My favorite of the bunch is Broadcom because I think its business has the highest growth potential, and I expect its dividend growth rate to be significantly faster than that of either IBM or HP.
That being said, IBM offers the highest yield of the three today, and if the company gets back on a sustainable revenue and free cash flow growth track, investors could see both meaningful share price appreciation as well as an acceleration in its dividend growth rate in the coming years.
HP Inc has the lowest yield of the three, but it's the cheapest stock of the bunch on a trailing price-to-earnings basis, trading at 8 times trailing twelve-month earnings, versus 15 times for IBM and 21 times for Broadcom. The jury is still out as to whether HP's stock is cheap for a good reason.
HP Inc also seems to be focusing a significant amount of its free cash flow on share repurchases, but if it wanted to significantly beef up its dividend to bring in more income-oriented investors, it would certainly have the financial wherewithal to do so. The company's shares could also offer significant capital appreciation in the near to medium term if it's able to successfully demonstrate to investors that its business is more sustainable than what its market price versus earnings seems to suggest.
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Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool is short shares of Hewlett Packard Enterprise Co and IBM. The Motley Fool recommends Broadcom Ltd. The Motley Fool has a disclosure policy.