DIndividual investors tend to ignore tech stocks. As an industry heavily focused on emerging companies and rapid growth, these companies have often chosen to reinvest in themselves rather than distributing cash to shareholders.
However, mature tech companies tend to buck this trend, and many are offering payouts well above the S&P500 average yield of 1.6%. A combined portfolio of AT&T (NYSE:T), International Business Machinery (NYSE: IBM)and intel company (NASDAQ: INTC) demonstrates such cash flows. A relatively modest investment can yield $1,000 in total annual income.
A cash cow yielding 5%
Justin Pope (AT&T): Investing in telecommunications giant AT&T is like pressing the easy button for dividend investors. It pays a quarterly dividend, totaling an annual total of $1.11 for shareholders. You would need to buy even 300 shares to generate annual dividend income of $333, a total investment of $6,370 at the current share price.
AT&T is the leading telecommunications company in the United States, with approximately 43% of the wireless market. Only a few companies Verizon and T-Mobilecompete with AT&T because the billions of dollars needed to invest in upgrading and maintaining cellular networks each year discourage new companies from entering the industry.
Additionally, smartphones have become a central part of modern society’s lifestyle, which means that people generally pay their phone bills, regardless of how the economy is changing. It’s more of a household necessity than a discretionary luxury these days.
AT&T had a rough decade, going into deep debt to acquire DirecTV and Time Warner to build an entertainment business. It didn’t work, and AT&T sold and divested its entertainment assets to become pure telecom again.
The company received $43 billion from the Time Warner spinoff to pay off debt, and management cut the dividend payout ratio to just 40% to 43% of estimated free cash flow. Remember that AT&T is returning more than 5% despite the cut, and now shareholders can feel good that the dividend is affordable.
Analysts estimate that AT&T’s earnings per share (EPS) will grow nearly 4% annually over the next three to five years. You’re going to buy AT&T for that hefty dividend, but getting some growth with it should help fuel future dividend increases while adding to your total returns.
Investors looking for passive income should consider this old-school tech name
Jake Lerch (IBM): If you’re looking to maximize passive income, there are certain things your stock investments should have. It might even be worth developing a checklist, to make sure that every stock you own has the necessary ingredients that make for a great passive income stockpile. Here’s mine:
- Substantial dividend yield
- Low volatility
- Significant free cash flow or cash
- Reasonable valuation
One technology company that ticks all of these boxes is IBM. Let’s go through each element.
IBM pays $1.65 per quarter – $6.60 per share per year – good for a dividend yield of 4.8%. IBM shares are currently trading at $137.50, so 50 shares (a $6,875 investment) will generate $330 in annual dividend income.
Volatility is a measure of price stability. Beta is a mathematical expression of volatility. Stocks with a beta of 1.0 are perfectly correlated with S&P500 index, while those with a beta of 2.0 would have twice the volatility of the index. IBM has a beta of 0.94, meaning the stock trades more or less in tandem with the S&P 500 Index. This level of stability is close to the sweet spot when looking for passive income-generating stocks.
Significant free cash flow or cash
IBM generates $9.47 of free cash flow per share, or $8.6 billion in total. As of the last quarter, the company had $10.5 billion in cash or cash equivalents. However, it has significant debt, with over $57.6 billion in debt. Nevertheless, it generates enough cash and has enough cash to continue to service its debt and pay its current dividend. However, investors should keep an eye on IBM’s balance sheet; rising interest rates could force it to cut its dividend if it fails to generate enough free cash flow.
IBM’s current price-to-book ratio is 6.5, while its 10-year average is 8.1. This valuation isn’t cheap or expensive, as it swings between similar legacy tech companies like Texas Instruments (price-to-book of 9.9) and Cisco (4.4).
The former chip industry leader who became a surprising dividend stock
will heal (Intel): Intel looks like a counterintuitive choice at first glance, as its old rivals seem to have eclipsed this longtime industry leader. However, Intel has set itself the goal of regaining its lead, and it is showing partial signs of success. According to a Morgan Stanley report, Intel’s Alder Lake processor caused AMDto drop 26%, an indication that Intel can still be competitive in this market.
Meanwhile, Intel shares fell amid tech selloffs. It also faces pressure due to the tens of billions it plans to spend to enter the foundry business and attempt to technologically catch up with the current foundry industry leaders, TSMC and Samsung.
But that share price drop could highlight Intel’s $1.46 per share annual dividend, which now yields 3.9%! Although this return is slightly lower than those of AT&T and IBM, an investment of $8,380 (about 228 shares) will yield about $333 per year.
Additionally, Intel has increased that payment most years since 2004, and amid the company’s struggles, it should maintain that pace. In 2021, it generated $11.3 billion in free cash flow, enough to cover the $5.6 billion cost of the dividend.
That doesn’t mean Intel’s struggles are over. In the first quarter of 2022, it reported $18.4 billion in non-GAAP revenue, down 1% year-over-year. Higher cost of sales and higher operating expenses led to a 35% drop in non-GAAP net income during that period to $3.6 billion.
However, the stock is selling at a price-to-earnings ratio of six, and it has fallen to less than 1.5 times its book value, which arguably makes it too cheap to ignore. This is especially true for dividend investors, as payouts will likely continue to rise.
Intel’s goal of becoming the chip industry leader still looks like a tall order. However, if it can achieve at least partial success, its earnings, stock price and dividend payout should increase significantly over time.
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Jake Lerch has positions at AT&T, IBM and Verizon Communications. Justin Pope has no position in any of the stocks mentioned. Will Healy holds positions in Advanced Micro Devices. The Motley Fool holds positions and recommends Advanced Micro Devices, Cisco Systems, Intel, Taiwan Semiconductor Manufacturing and Texas Instruments. The Motley Fool recommends T-Mobile US and Verizon Communications and recommends the following options: long calls January 2023 at $57.50 on Intel and short calls January 2023 at $57.50 on Intel. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.