For investors looking for a hefty dividend yield on a stock, the focus is usually on healthcare, energy, telecom and utility companies. Yet there are some categories that get overlooked — such as tech stocks.
Keep in mind that it is not unusual for a mature tech operator to have high operating cash flows. After all, the capital costs are usually fairly light. But mature tech stocks may also have many of their customers locked in due to the importance of the technology in place. Selecting a new vendor would simply be too much of a headache for most companies.
In light of these factors, a high dividend yield can be fairly safe. So what are some of the tech stocks that offer hefty yields — say more than 3%?
Here’s a look at four of them.
Dividend Tech Stocks — CA Technologies (CA)
CA Technologies (CA), which develops software development and management tools, has been around for 40 years. It’s true that growth has been a slog lately, as CA still has a large amount of legacy business from mainframes.
But going forward, the company may get a boost because of some major investments in its technology. For example, the company recently launched a cloud version of its management software and it appears to be getting traction, thanks to a seven-figure deal with TriZetto. But CA has also launched other offerings, such as API management (which is critical for cloud environments), security and mobile. CA has also been experimenting with new distribution models, like free versions that allow customers to test the software.
In the meantime, CA’s core business remains solid. Because of its high margins, the company is expected to post more than $1 billion in operating cash flows for fiscal-year 2015. In other words, there should be no fear that the dividend yield will be in jeopardy.
Dividend Tech Stocks — Seagate (STX)
Seagate (STX) is another old-line tech operator, whose origins go back to 1979. The company is a pioneer of the disk drive space and has been able to overcome tremendous competition over the years. Now, with only a few players in the market, the pricing environment has been much more stable.
But the overall market also looks bright. With the growth in cloud computing and mobile, there has been more demand for storage. Oh and even PCs have been a source of growth as sales have improved lately.
In the latest quarter, Seagate’s revenues jumped by 8.5% to $3.79 billion and adjusted earnings came to $1.34 per share. Keep in mind that the forward price-to-earnings ratio is still only about 11.
While Seagate remains focused on share buybacks and healthy dividend payouts, there is still money left over for acquisitions, which have helped maintain the company’s competitive advantage. The good news is that the dealmaking has been disciplined and smart — particularly the deal for Xyratex, which develops storage for enterprise systems.
Dividend Tech Stocks #3: Garmin (GRMN)
Dividend Yield: 3.5%
Garmin (GRMN) has built a strong business by selling navigation devices. And while growth has slowed over the years, it is still respectable. In the latest quarter, revenues increased nearly 10% to $706 million and unit shipments hit 3.7 million, up 12%.
Garmin sells to various segments, such as for outdoor (devices for golf, dog tracking and training), aviation, marine and auto. But perhaps the most interesting one is fitness. In the quarter, revenues shot up by 43% because of strong sales of activity trackers and running products.
For the most part, Garmin is getting a piece of the red-hot market for wearables, which is still in the early stages. As seen with the massive growth and success of GoPro (GPRO), it could prove to be quite lucrative.
Garmin has been able to leverage its long history of navigation technology but also has the advantage of hefty cash flows to invest in the fitness category. For the first nine months of 2014, cash flows from operations came to about $378, which should make for a safe dividend.
Dividend Tech Stocks — Lexmark (LXK)
Dividend Yield: 3.13%
Over the past few years, Lexmark (LXK) has been transitioning away from its legacy business of printers and related supplies. The move has been rough but necessary.
The strategy is to leverage Lexmark’s distribution and printing technology into higher value market segments. For the most part, this means selling software to help companies manage their unstructured data like spreadsheets, email, files, videos and images. As should be no surprise, a key part of the technology is to rely on the cloud. In fact, Lexmark believes that the market opportunity is about $80 billion.
To pull off this transition, Lexmark has been aggressive with its dealmaking. For example, the acquisition of ReadSoft has provided more than $100 million in additional revenues and has given the company access to distribution across more 70 countries. The technology also has deep integration with systems from SAP (SAP) and Oracle (ORCL).
But Lexmark is still mindful of making sure it provides for a healthy dividend yield. And it certainly helps that cash flows have remained strong. For the first nine months of 2014, cash flows came to $235 million. In fact, Lexmark has been cash flow positive for 12 consecutive calendar years. Now that’s what you like to see from dividend tech stocks.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.