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3 Top High-Yield Tech Stocks

Danny Vena, Brian Stoffel, and Nicholas Rossolillo, The Motley Fool

Tech and high yield might seem contradictory terms. After all, the vast majority of technology companies are squarely focused on growth, while most dividend payers -- especially those with high yield -- typically see much more tepid increases. The apparent oxymoron aside, it is still possible to find stocks that provide the best of both worlds, appealing to technology and dividend investors alike.

With that in mind, we asked three Motley Fool contributors to identify top tech stocks that provide a better-than-average yield. Read on to find out why they chose Vodafone (NASDAQ: VOD), Microsoft (NASDAQ: MSFT), and Crown Castle International (NYSE: CCI).

Seedlings sprouting from a pile of gold coins.

Image source: Getty Images.

Not exactly tech, but...

Nicholas Rossolillo (Vodafone): I'll admit I'm cheating on this one because Vodafone is actually a telecom company. With mobile networks acting as an extension of the internet these days, though, I felt like it was close enough to include in a technology article. Plus, the stock currently yields 8.3%.

As with most high-yielding dividend-paying companies, there is a reason for the big paycheck. In Vodafone's case, share prices have been in decline for years -- ever since Verizon bought back the 45% stake Vodafone owned for $130 billion in 2014. That huge payoff was as good as it was going to get for some time as revenue and earnings have been in a slow-but-steady decline ever since.

Vodafone is the U.K.'s largest wireless network provider, but through various joint ventures, investments, and partnerships, the company has a globe-spanning presence. Just as competition over wireless customers has been fierce here in the U.S., so it has been in other countries as well. Italy and India have especially weighed on overall results as of late, with pricing on wireless services under pressure from competitors battling for subscribers.

The company has shuffled operations around to boost profitability (like the offloading of its India business into a joint venture), and rising use of consumer and business data services has also been a bright spot. As a result, revenue and free cash flow -- money left over after basic operations and capital expenditures -- are showing signs of life. The company is now fully covering its dividend payments with free cash once again.

A group of four people standing around using mobile phones.

Image source: Getty Images.

If the company can maintain its rebound, share prices should make a turn for the better after a 30% drop this year. Plus, shareholders get to collect that generous dividend along the way.

A high yielder -- over the long run

Brian Stoffel (Microsoft): I won't blame you for rolling your eyes that I picked Microsoft. The company's current dividend yield of 1.5% is hardly what one would consider a "high yield" -- but hear me out. I usually shy away from high-yield stocks, especially in the technology sector; many of these stocks have high dividends for a reason -- investors believe they are higher risk and drive the price of the stock down.

If we look at the long arc of Microsoft's dividend, however, I think there's a compelling case to be made. Consider that if you bought shares over 10 years ago -- in January 2008 -- you were getting a 1.23% yield. But if you've held throughout, you are now getting an annual yield of 4.72% on your original purchase.

That's because Microsoft has raised its dividend for 12 consecutive years. And if you look at the company's free cash flow -- that source from which dividends are paid -- you'll see a cash machine that generates more and more greenbacks every year.

Metric 2015 2016 2017 2018
Free cash flow (FCF) $23.7 billion $25.0 billion $31.4 billion $32.3 billion
Dividend payout from FCF 42% 44% 38% 39%

Data source: Yahoo! Finance. Chart by Author.

There are two important things to note from this. First, FCF has grown by 36% over the past three years. And that free cash flow is protected by an impressive moat given the company's transition to a software-as-a-service model. Second, the fact that only 39% of FCF is being used to pay the dividend means that it is both safe, and has lots of room for growth.

If, for example, Microsoft were able to continue growing its dividend by 10% per year over the next decade -- slower than the 14% growth it experienced over the prior decade -- you would be left with a 4% yield based on today's prices. While that may not be as sexy as a  company with a 5%-plus dividend, I believe it's a solid long-term bet.

A tech infrastructure play

Danny Vena (Crown Castle International): The competition for wireless customers has become cutthroat, as carriers offer better and better deals to attract customers. That has led to the inevitable wave of consolidation in the field, with the most high-profile marry-up occurring between Sprint and T-Mobile.

In an effort to slow this race to the bottom, telecom companies are building out the speed and capabilities of their networks with the pending arrival of 5G. The newest generation of mobile communications technology will result in far greater speeds and increased data transmission capabilities. While estimates vary considerably, 5G will likely result in delivery speeds at least 10 times faster than what's currently possible with 4G. Add to this the estimated 50 billion connected devices that are expected to come online by 2020, and it's easy to see how demand for coverage soar.

Two cell towers with a sunset in the background.

Image source: Getty Images.

While telecom operators are fighting for the spoils, the big winners will be the companies that own the transmission towers like Crown Castle International -- the nation's largest provider of wireless infrastructure. The company boasts 40,000 towers and 60,000 route miles of fiber-optic cable supporting another 60,000 small cell antennas. 

The company is also a tax-advantaged company that qualifies as a real estate investment trust (REIT). Businesses that meet this IRS classification aren't taxed at the corporate level, but are required to pay out at least 90% of their profits to shareholders as dividends. This allows Crown Castle International to provide a higher-than-normal payout, currently yielding 3.77% -- without the uncertainties that typically accompany high yield. The company has a long-range plan to increase its dividend by 7% to 8% per year going forward. 

Investors looking for a high yield in tech should really consider Crown Castle International.

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Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Brian Stoffel has no position in any of the stocks mentioned. Danny Vena has no position in any of the stocks mentioned. Nicholas Rossolillo owns shares of Microsoft. The Motley Fool recommends Crown Castle International and T-Mobile US. The Motley Fool has a disclosure policy.