Investors have traditionally turned to sectors outside of tech when looking for dividends. However, as that industry has matured, tech stocks have increasingly begun offering dividend payouts.
Now that October has arrived, many tech dividend stocks will announce earnings for the previous quarter. Some of these stocks pay dividends well above the S&P 500's average yield of around 1.8%. Many of those also maintain track records of annual dividend increases.
As AT&T (T -0.44%), International Business Machines (IBM -0.94%), and Juniper Networks (JNPR) prepare to make their quarterly earnings announcements, they could report results that not only reinforce their dividends but also set the stage for eventual stock growth. Let's take a closer look at these three dividend-paying tech stocks and see if they might be worth picking up in October.
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1. AT&T
AT&T reports earnings on Oct. 22. This will occur as Apple gets ready to release its first 5G iPhones -- if the rumors prove true. This should benefit AT&T, as it is one of only three companies offering 5G network access in the U.S.
When it comes to tech dividend stocks, few companies can beat AT&T. Its $2.08 per share annual payout currently yields 7.3%. Moreover, its 35-year history of annual payout hikes makes it likely it will choose to hold its Dividend Aristocrat status by increasing its payout again next year.
Maintaining that status is one reason why the dividend remains high. However, its stock price has seen no net growth in about 25 years. Disappearing monopolies, wireless investments, price competition, and cord-cutting have pressured the stock for decades.
Nonetheless, it holds its own financially. AT&T generated $7.59 billion in free cash flow during the quarter. Since the company paid out just over $3.7 billion in dividends over the same period, the payout remains sustainable.
Furthermore, the forward price-to-earnings (P/E) ratio has fallen below nine. At such levels, investors may want to buy AT&T for the dividend alone. Should the earnings report bring news of unexpected 5G revenue or the sale of underperforming assets, it could serve as an added bonus for AT&T stock investors.
2. IBM
IBM has set a preliminary date of Oct. 19 for its third-quarter earnings announcement. Like AT&T, IBM's dividend has become the best reason to own the stock in recent years. This year marked 25 years of consecutive payout hikes, making it a new Dividend Aristocrat. At this year's payout level of $6.52 per share, IBM stock yields approximately 5.4%.
Moreover, despite company struggles, the dividend remains safe. In the previous quarter, the $1.45 billion cost of the dividend was far below the $2.29 billion IBM generated in free cash flow. This should help IBM fund the payout and annual increases for the foreseeable future.
Still, despite its cash flows, changes in the tech industry led to revenue declines for most of the 2010s. As a result, IBM turned to the cloud. It spent $34 billion to acquire Red Hat in 2019. In April, it elevated Arvind Krishna, the head of the cloud and cognitive software division, to the CEO position.
Indeed, a successful turnaround will take time. The last earnings showed a continuing drop in revenue. However, total cloud revenue increased by 30% and now accounts for about 34% of company revenue.
It remains uncertain how IBM stock will react following the upcoming earnings report. Nonetheless, if the rapid growth of cloud revenue continues, IBM stock could become a growth as well as an income play.
3. Juniper Networks
Juniper Networks will report third-quarter earnings on Oct. 27. The company produces telecom equipment, cybersecurity products, and software for networking. Juniper was a darling of the dot-com boom of the late 1990s, but the stock has gained little traction over the last few years.
However, Juniper has redefined itself into a potentially lucrative dividend stock. This year's annual dividend of $0.80 per share yields more than 3.7%. In 2018, it began to hike the payout. Juniper has increased the dividend in each of the last three years.
For now, its prospects look best as a dividend stock. In the first half of 2020, the dividend expense of about $132 million was well below the free cash flow of around $326 million. This should keep the dividend safe. Investors can buy this cash stream for about 12 times forward earnings.
Still, sluggish profit growth probably explains the low multiple. It is only next year that analysts forecast income to grow beyond 2015 levels!
However, this stagnation could end over the next few quarters. Cloud has begun to claim an increasing share of Juniper's revenue. Additionally, the consumer move to 5G and 400G could lift both revenue levels and the stock price over time.
It remains unclear whether the upcoming report will reflect this potential. Still, regardless of the effect it has on the stock, investors can at least collect a generous payout while they wait.
