2023-07-31 14:10:10 ET
Summary
- Most tech stocks have low or no dividend yields, but there are some tech stocks with yields over 2.5%.
- There's even a handful with yields pushing 5%.
- One relatively high yield tech stock is HP Inc, which Berkshire Hathaway has been buying in recent quarters.
- In this article I explore HP and two other high yield tech stocks that can add income to your portfolio.
Most investors don’t associate tech stocks with high dividend yields. Most tech stocks don’t pay dividends at all, and the few that do, usually have very low yields. Take Apple (NASDAQ: AAPL ) for example. The stock has paid a dividend for years, and has even raised it a few times, but the yield remains a paltry 0.49% .
However, it is possible to find yield among tech stocks. It isn’t the most common thing, but it’s out there if you know where to look. There is at least one major technology company whose shares yield over 4%, and several others with yields in the 2.5% to 3% range.
With all that being said, the term “high yield” means a different thing when applied to the technology sector than it does when applied to the markets as a whole. If you’re looking for yields in the 6%-8% range, the tech sector is probably not the place to look. In tech, a “high” yield is anything over 2.5% in my view. Arguably, that is a high yield relative to the stock market: the S&P 500 yields a mere 1.43% . The point is that a “high yield tech stock” has a relatively modest yield compared to banks and REITs.
In this article I will explore three tech stocks that have relatively high yields for their sector. All of them yield more than 2.5%, and one of them is pushing 5%. Among these stocks is a name that Warren Buffett's Berkshire Hathaway (BRK.A) (BRK.B) has been buying recently, and another that it owned in the past. All of them have much more yield than you’ll find on the NASDAQ-100, or any randomly chosen collection of tech stocks.
So, let’s get started with stock #1.
Texas Instruments
Texas Instruments (NASDAQ: TXN ) is an American technology company that’s perhaps best known for its calculators . Math and business students around the world are familiar with TXN through its TI-84 graphing calculator and BAII Plus financial calculator. Calculators are TXN’s best known consumer offering, but the company offers much more than that. Primarily, TXN is a semiconductor company providing chips and chip components to a variety of different industries, including automotive, audio/video, wireless networking, and enterprise systems. The company produces entire products, such as solid state drives , as well as components, such as audio amplifiers .
This year, semiconductors are in the midst of a downturn, though some think we’ve hit a trough . TXN’s most recent earrings are consistent with that observation: revenue declined 13%, and earnings declined by 25%. Those numbers aren’t pretty, but on the other hand, they beat analyst estimates . The stock nevertheless slid after they came out due to weak guidance .
TXN stock currently has a 2.78% dividend yield–well above average for a tech stock–and trades at ‘moderate’ multiples according to Seeking Alpha Quant, with a ‘C’ rating, about average for its sector. It has a 57% payout ratio , which is relatively low, suggesting high dividend safety.
TXN valuation multiples (Seeking Alpha Quant)
HP
HP Inc ( HPQ ) is an American manufacturer of computers, printers and peripherals. Its thin and light laptops, such as the Envy line, are very well reviewed. For this reason, they alongside Dells are often considered “MacBook alternatives” for those committed to Windows. HP is currently part of the Berkshire Hathaway portfolio, and Warren Buffett and team have been adding to the position in recent quarters.
HP’s most recent quarter was mixed, with a large decline in revenue but a 14% increase in GAAP earnings and a 25% increase in free cash flow . Although revenue declined, the cost of revenue declined even more, contributing to a large increase in cash flows.
At today’s prices, HP stock yields 3.22% , a hefty yield for a tech stock. Despite this, the payout ratio is a mere 29.8%, suggesting a high level of dividend safety. The stock is also pretty cheap , trading at 9.5 times adjusted earnings, 12.5 times GAAP earnings, and 11 times operating cash flow. Overall, it’s a rare tech dividend opportunity that merits a serious look.
IBM
Next up we have IBM Inc ( IBM ). This company was once best known as a manufacturer of computers, most notably the Thinkpad Laptop. That business unit was sold to Lenovo, leaving IBM primarily as a developer of enterprise software. It also manufactures networking equipment .
IBM has been making big investments in artificial intelligence for a long time. Its Watson supercomputer was famously the first to beat a reigning chess champion (Gary Kasparov) in a real world match. Today, its IBMWatsonX AI software is used by dozens of companies ranging from Intel ( INTC ) to Samsung ( SSNLF ) to to SAP ( SAP ).
In its most recent quarter, IBM beat on both adjusted and GAAP earnings. Revenue was up 0.4% y/y on a constant currency basis. Gross profit grew 3% y/y. Net income grew 8% and diluted EPS grew 7%. The gross profit margin was 55%. Overall, not a bad quarter.
Where things get less appealing with IBM is its long term trajectory. According to Seeking Alpha Quant, the company’s revenue and earnings are both down over 3, 5 and 10 year timeframes. That’s not a great trajectory. On the other hand, the company scores well on profitability, with a 16.6% free cash flow margin and a 10.5% return on equity.
IBM’s dividend yield is 4.63% and the payout ratio is 78%. That’s not the lowest payout ratio I’ve ever seen but it’s not so high that the dividend is at risk of being cut in the near future.
The Bottom Line
The bottom line on dividend paying tech stocks is that they are rare, but they can be found. These days, Apple and Microsoft ( MSFT ) are both paying small dividends, while less established tech companies often have genuinely high yields. Of the three stocks on this list, two of them have yields higher than 3%, and they all have yields far higher than the S&P 500. So, if you’re looking to add some yield to your portfolio, tech stocks are far from out of the question.
For further details see:
3 Tech Stocks That Are Bursting With Yield