The technology sector had a very rough 2022, with the Nasdaq 100 (QQQ) down by about 33% and Cathie Wood's Ark Invest Innovation ETF (ARKK) down by a whopping 67%.
As a result of the selloff, there are some technology stocks that now offer high dividend yields. This is not typically the case given that technology companies are generally much more growth oriented and tend to reinvest earnings into further research and development in order to capitalize on their technical know-how and strengthen their competitive advantage. Given this, now could be a very opportune time for high-yield investors to capitalize on these yields by adding technology stocks to their portfolio.
Cutting Edge With an Attractive Yield
Intel Corp. (INTC) ships about 85% of the world's microprocessors, making it the leading manufacturer of microprocessors for personal computers. Furthermore, it manufactures products for cloud computing such as servers and storage devices.
While it faces steep competition in the race to develop superior technology, Intel does possess the competitive advantage that comes from scale, which gives it more resources to pour into research and development. It also gives the company greater capacity to meet demand during boom periods for the sector. Last, but not least, as a U.S. company in a strategic industry, it benefits from the increasing re-shoring of the industry and is building plants in the United States accordingly.
Moving forward, its near-term growth is difficult to project given that the industry is notoriously cyclical, and the economy appears to be on the verge of a downturn. As a result, while earnings per share have averaged an 11% CAGR over the past decade, we are only forecasting a 5% EPS CAGR over the next half decade.
While INTC's current 5.2% dividend yield is very attractive and is fully covered by earnings with a reasonable 75% payout ratio, it is not what we would call a safe dividend. This is because the industry is facing headwinds and Intel's profit margins are declining while some of its products are also losing market share. As a result, it needs to continue pouring billions of dollars into capital expenditures to try to sustain and recapture market share.
Meanwhile, if Intel's earnings fall in a recession, its payout ratio will very possibly exceed 100%. Depending on the length of the recession and how fruitful the company's R&D spend ends up being, the company may elect to cut its dividend in order to invest more into the business and preserve its balance sheet.
For now, however, the yield looks very attractive for a cutting-edge technology stock with a reasonable payout ratio and decent long-term growth prospects.
'Think' About This One Yield Investors
IBM (IBM) is a storied information technology company with a global presence. It provides integrated enterprise solutions for software, hardware, and services. The company's revenues are generally quite sticky thanks to a vast intellectual property portfolio, high switching costs, and counterparties that include some of the world's largest companies and government agencies.
The company's ability to provide end-to-end solutions for clients make it a popular choice and give IBM pricing power. After a recent spinoff, IBM now has four business segments: Software, Consulting, Infrastructure, and Financing.
Given its large legacy businesses that were experiencing a gradual decline in revenues, IBM has had difficult generating consistent top-line growth in recent years. Further compounding the challenges for IBM has been the fact that it has poured tens of billions of dollars into share buybacks over the years instead of investing more aggressively into its strategic growth initiatives in cloud and IT SaaS.
Meanwhile, its fellow large and mega-cap technology rivals like Amazon (AMZN) , Oracle (ORCL) , Microsoft (MSFT) , and Alphabet (GOOG) (GOOGL) have invested much more aggressively into these emerging technologies and therefore outclassed IBM. As a result, IBM has lost out on a lot of potential market share in these businesses and is now more of a slower growth technology utility company with a wide moat around most of its current revenues, but a less-robust growth path moving forward.
IBM's current dividend yield of 4.9% is very attractive for a large-cap technology company and should be quite sustainable moving forward given that the company generates a lot of free cash flow. With a 67% payout ratio, IBM's dividend is well-covered and likely to continue growing for years to come given its 27 year dividend growth streak that makes it a Dividend Aristocrat.
That said, given that it is trying to deleverage its balance sheet right now and the annualized per-share earnings growth expectation over the next half decade is just 4%, we do not expect the dividend to grow above a low single-digit CAGR through 2027.
A Well Documented Payout
Xerox Corp. (XRX) has a lengthy history, tracing its lineage back to 1906 in the form of The Haloid Photographic Company, which manufactured photographic paper and equipment. It has morphed into the Xerox of today through a series of mergers and spinoffs and now focuses on the design, development, and sales of document management systems.
The company has struggled to generate meaningful growth over recent years, and this is expected to continue moving forward, with earnings per share coming in at $1.51 in 2021 and expected to remain in between $1 and $2 for the foreseeable future. That said, despite the business shrinking overall, the per-share earnings should remain quite stable as the company is generating a lot of cash flow and is buying back stock very aggressively. It has reduced its share count from 255 million in 2017 to just 155 million today. We expect this trend to continue moving forward.
Meanwhile, it is also paying out a generous $1 per share dividend that it has sustained since 2017. As a result, the current dividend yield is roughly 6%, making it an extremely attractive dividend stock.
With the company expected to generate $1.43 in EPS over the next 12 months, the dividend looks quite safe for the foreseeable future. That said, given that the company is so focused on share repurchases, it is unlikely that the board will decide to raise the dividend anytime soon.
Final Thoughts
Thanks to a very sharp selloff in the technology sector in 2022, there are numerous compelling bargains in the space today.
These three high-yielding technology stocks offer investors a rare opportunity to lock in lucrative and sustainable income streams from a sector where dividend income is scarce.
