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3 Dividend-Paying Tech Stocks to Buy Right Now

Motley Fool - Tue Nov 21, 2023

Technology companies are known for strong revenue growth fueled by their innovations, but that doesn't always translate to the bottom line. A number of tech companies are not profitable, but profits are a must in order to pay dividends. Otherwise, it should raise questions over the affordability of that dividend.

For example, data storage provider Seagate Technology(NASDAQ: STX) delivered an attractive yield of 3.7% at the time of this writing. But look past that juicy yield at the company's financials, and it's not a pretty picture.

In its fiscal first quarter, ended Sept. 29, Seagate paid out dividends of $145 million but suffered a net loss of $184 million. The company also generated free cash flow (FCF) of $57 million. FCF provides insight into the cash available for a company to invest in its business, pay debt obligations, repurchase shares, and hand out dividends. With no profit and a dividend payout more than double its FCF, Seagate can't sustain a payout if its financials don't improve.

Fortunately, plenty of tech companies with excellent financial health pay dividends. Here's a look at three that can deliver dependable passive income: Cisco Systems(NASDAQ: CSCO), IBM(NYSE: IBM), and Verizon Communications(NYSE: VZ).

Cisco: 3.3% dividend yield

Tech veteran Cisco is a compelling dividend stock for several reasons. It began as a computer networking company, then expanded into a variety of software businesses, such as cybersecurity.

The expansion from networking hardware into software enabled Cisco to implement a software-as-a-service (SaaS) subscription model. This gives it recurring revenue, adding to its ability to pay its dividend, and helping grow its business.

Its fiscal first quarter, ended Oct. 28, was the strongest first quarter in company history. Revenue increased 8% year over year to $14.7 billion, and net income rose 36% year over year to $3.6 billion.

That performance was an extension of Cisco's strong fiscal 2023, ended July 29, in which year-over-year revenue jumped 11% to $57 billion, and net income increased 7% to $12.6 billion.

With its strong financials, the company can deliver a solid dividend yield of 3.3%. Cisco raised its dividend in 2023 for the 13th consecutive year, a good track record of increases.

The dividend payout ratio, which tells you the percentage of a company's earnings used for its payout, was 47%, leaving plenty of cash to reinvest in its business. For instance, Cisco recently announced it was buying Splunk, a cybersecurity analytics firm. This strengthens the company's cybersecurity offerings while adding Splunk's growing revenue to its financials, further improving Cisco's ability to pay its dividend.

IBM: 4.3% dividend yield

Venerable IBM delivers a dependable dividend. Big Blue provided a payout since 1916 with an impressive 28-year streak of consecutive annual increases. On top of that, the company offers a robust dividend yield of 4.3%.

It's well positioned to fund its dividend. In 2020, IBM shifted its focus to the red-hot industries of cloud computing and artificial intelligence, enabling it to steadily increase revenue since that time.

IBM Revenue (Annual) Chart

Data by YCharts.

IBM is now one of the top 10 cloud computing companies in the world, and its success shows in its results. In the third quarter, it generated sales of $14.8 billion, a year-over-year increase of 5%. Net income and FCF both hit $1.7 billion.

Its dividend payout ratio is on the high side at 87%, but its $10.3 billion in FCF over the trailing 12 months comfortably covered its dividend payments of $6 billion over that period. IBM expects to end 2023 with $10.5 billion in FCF, illustrating its consistency in generating free cash flow.

Verizon: 7.3% dividend yield

This telecom is tops among the companies on this list when it comes to dividend yield, currently over 7%. Verizon raised its payout for the 17th consecutive year in September, giving it a solid track record of increases.

The dependable dividend is thanks to the bulk of its revenue coming from wireless subscribers, a reliable source given our dependency on mobile phones today. Third-quarter wireless revenue grew 3% year over year, accounting for $19.3 billion of the $33.3 billion in total sales.

Verizon also consistently generates strong free cash flow, which reached $6.7 billion in the third quarter. Year to date, it stands at $14.6 billion, $2.2 billion higher than 2022, and it already surpasses 2022's full-year FCF of $14.1 billion. As a result, Verizon raised its 2023 FCF forecast by $1 billion to $18 billion.

The dividend payout ratio of 53% provides room to pay down debt and invest in its new, more powerful 5G network, which should be a source of revenue and free cash flow growth for years.

Thanks to solid financials, Verizon, Cisco, and IBM are three great income stocks to add to your portfolio.

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Robert Izquierdo has positions in Cisco Systems, International Business Machines, Splunk, and Verizon Communications. The Motley Fool has positions in and recommends Cisco Systems and Splunk. The Motley Fool recommends International Business Machines and Verizon Communications. The Motley Fool has a disclosure policy.

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