3 Dividend-Paying Tech Stocks Selling at a Bargain

published 21 September 2016

We went looking for big-name stocks with above-average dividend yields and below-average price-earnings ratios. Some on Wall Street call them YARP stocks, for yield at a reasonable price. With help from research firm Morningstar, we found eight promising YARP stocks for dividend investors, including the three technology companies below.

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All of the companies have market capitalizations of more than $5 billion, and the stocks are cheaper than, and yield more than, Standard & Poor's 500-stock index. To be specific, we sought stocks that yield at least as much as the index’s 2.1% yield and trade for less than its price-earnings ratio of 17 (based on estimated earnings over the next four quarters). Prices and related data are as of September 1.

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The valuation story: Given Cisco's size and the extent of its domination of the hardware markets, its fast-growth days are just a memory. In the last fiscal year, sales rose a mere 3%. That slow growth explains the stock's low P/E of 13. Yet value-hunting investors have made the stock a big winner over the past four years, with the price doubling in that period. Cisco's appeal now is twofold: First, its massive router and switch business generates huge amounts of cash, which supports fat dividends. Second, it is slashing costs in its old-line businesses while investing heavily to drive a new growth phase: selling software to run its hardware. The idea is to offer Cisco's hardware users a way to make their computer networks more efficient and easier to manage. For Cisco, the attraction of software is that profit margins are richer than for hardware.

The yield story: There is no guarantee Cisco will succeed in significantly boosting growth. But investors can still be confident about earning hefty dividends along the way. Since 2011, the dividend has risen at an annualized rate of 34%. With $66 billion in cash and securities on its balance sheet, Cisco has the resources to keep dividend hikes coming. Brokerage Barclays calls the company a "steady ship and an attractive industrialized tech play."

The valuation story: The decline of PC sales is forcing Intel to reinvent itself, but the process has been slow. Total revenue of $55.4 billion in 2015 was up just 2.5% from 2011, and per-share earnings were down 2.5% over the same period. The lack of growth has, understandably, left investors unwilling to put a high valuation on the shares, which trade for just 14 times estimated year-ahead earnings. But optimism about 2017 has given the stock a lift this year, to its best levels since early 2015. Bulls on Intel note the pickup in demand for chips used in powerful servers at the heart of "cloud" computing (the delivery of myriad computer services via the internet). S&P Capital also sees "significant opportunities" in new memory chips and in chips for the "Internet of Things" (smart household appliances, for example). Another profit source: Intel has ramped up making chips under contract for other companies, including for cell phones — a sector in which Intel stumbled badly with its own chip designs. All in all, analysts on average see sales hitting a record $59.8 billion in 2017 and profits reaching a record $2.73 per share.

The valuation story: Qualcomm's shares soared from nearly $10 in 2002 to more than $80 in 2014 as revenues and profits surged. But since 2014, a number of challenges have caused earnings to decline and raised doubts about the company's long-term outlook. One issue is rising competition from such chip giants as Samsung. Another worry: government probes into the fairness of Qualcomm's licensing fees. Qualcomm shares were nearly cut in half from April 2014 to February 2016, before rebounding this year. But with the stock trading at 14 times estimated year-ahead earnings, brokerage Goldman Sachs says it’s still a bargain. Qualcomm delivered a surprisingly strong profit report for the quarter that ended June 30, and Goldman says the company was "particularly positive" about both global chip demand and about resumed royalty collections in China, which settled its probe with Qualcomm in 2015. Long term, the company expects to benefit from advances in phone technology and from chip demand from emerging industries, such as self-driving cars.

The yield story: Qualcomm's royalties, about 35% of total revenue, have helped fund a generous dividend. The per-share payment has nearly doubled since 2012, and the stock now yields 3.3%. What's more, Qualcomm’s hoard of $31 billion in cash and investments provides security for the dividend and the wherewithal for reinvesting in the chip business. That said, the key to additional gains in the share price is whether last quarter's earnings momentum will continue.

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