Tech isn't the first place to look when it comes to high-yield dividend stocks. Nevertheless, that doesn't mean high-yield payers don't exist in this segment of the economy -- and picking the right ones could mean plenty of investment income and share-price increases over time.
Three Fool.com contributors think IBM (IBM -0.35%), Magic Software (MGIC -3.14%), and Lumen Technologies (LUMN -0.54%) are high-yield stocks worth a look right now. Here's why.
The new IBM is all about the cloud
Nicholas Rossolillo (IBM): Storied tech-giant IBM has languished for years. Over the last decade, shares are down 18% -- massively underperforming the S&P 500's over 200% return in that span of time. Even a big dividend payment, currently yielding 4.9% a year, was little more than a consolation prize.
But I think now's the time to pay IBM some attention again. The company purchased cloud-computing company Red Hat back in 2019 to supercharge its efforts in this fast-growing arena, laying the foundation for a return to growth and making IBM a leader in next-gen computing.
Cloud-computing revenue increased 19% in 2020 to $25.1 billion. However, sales overall declined 5% to $73.6 billion.
Clearly, IBM has been shackled by its legacy operations. New CEO Arvind Krishna announced last autumn that the company will take a big step to unleash IBM cloud's full potential.
By the end of 2021, IBM will spin off its Managed Infrastructure Services unit into a separate stand-alone company. There's no word yet on how big this company will be, but IBM's "Global Technology Services" segment, which houses managed infrastructure, hauled in $6.6 billion in revenue during Q4 2020 alone -- one-third of total revenue. This segment has been in overall decline for some time, so unloading it will facilitate some big changes for the new IBM and leave it a much more focused enterprise on its growing cloud segment.
Besides helping the company return to sales growth, spinning off its managed infrastructure should also provide a bump for IBM's profitability (since newer cloud-computing tech is a high-profit margin concern). And a bump in profitability means more cash coming in to spend on high-growth areas in the cloud-computing industry.
Even ahead of the spinoff, IBM has announced some small acquisitions in this area to bolster its offering. In the meantime, investors get treated to that nearly 5% dividend. Shares look like a real bargain at eight times trailing-12-month free cash flow if IBM's makeover pays off.
Image source: Getty Images.
Do you believe in Magic?
Anders Bylund (Magic Software Enterprises): Cloud-based software development expert Magic Software won't be a Dividend Aristocrat anytime soon. The company pumped the brakes on its payout in 2020, lowering the semiannual payment in June by half. Magic's dividends decreased by 17% overall in 2020, resetting the 30-year clock for that coveted aristocrat status.
The company was quick to get back into the dividend-boosting saddle. The annualized payouts of $0.42 per share are on track for a 65% year-over-year jump in 2021. The yield stands at a generous 2.6%.
But that's not all. Magic financed the rising dividend with just 27% of the thriving company's free cash flow, leaving ample room for further increases in years to come.
Magic's low-code development platform lets its clients create and manage their hybrid cloud-based business application mostly through point-and-click interfaces. The company serves a handful of very large companies, but the simple-development model is particularly well-suited to small and medium businesses. That's where Magic Software is targeting its marketing messages, driving fourth-quarter sales 15% higher through the addition of hundreds of smaller clients.
The juicy dividend policy might surprise you since Magic Software otherwise looks like a hungry growth stock -- an investment class that very rarely issues dividends at all. But the company has been around for 35 years, which is more-than-enough time to mature into a dividend-paying value stock. Having found a second wind in 2020 as businesses of every size were looking for cost-efficient software development tools that could keep them relevant in an increasingly cloud-oriented business world, Magic Software has something to offer for both growth and income investors.
New products and partnerships could turn this ship around
Billy Duberstein (Lumen Technologies): Wireline telecom-operator Lumen Technologies is the rare deep-value, high-yielding stock left in the technology sector, with a current yield around 7.8%. Yet despite the market's skepticism, there's actually reason to think the company may be able to turn things around at some point. As we saw last quarter with both GameStop, ViacomCBS, and others, it's possible for deep-value stocks to work should a credible turnaround strategy emerge.
While Lumen has several legacy technologies in decline, taking its overall top-line down with it, the company has also been investing in new technological capabilities, all while generating enough free cash flow to support its dividend and pay down debt. New technologies include SD-WAN, a DDOS cybersecurity prevention service, and Lumen's new edge computing platform. The new edge data centers, built on top of Lumen's nationwide and global fiberoptic network, are designed to allow enterprises to deliver applications in less than 5 milliseconds.
All in all, Lumen is targeting the edge, data center, content delivery, and security services markets, which add up to an addressable market of $198 billion. It's also forecast to grow at 14% between now and 2025.
Lumen, of course, won't get all of that market, as they're very competitive. Additionally, that growth will still need to offset declining revenues in legacy technologies like copper wire and landline phones.
Yet at least a few other industry leaders see value in partnering with Lumen. In fact, the company just inked a new partnership with T-Mobile, which has become the clear leader in 5G wireless. With Lumen's 180,000 on-net fiber-connected buildings, connections to all the major clouds, and now edge computing data centers paired with T-Mobile's leading 5G capabilities, the two could provide a rather powerful next-gen platform for enterprises looking for lightning-fast speed and ultra-low latency across a distributed environment.
In short, Lumen is one of the last deep-value stocks with the potential to rerate but hasn't rerated yet. That makes it a rare contrarian opportunity in a very optimistic market.
