Tech stocks are once again leading the market, with the sector outperforming both in regards to share performance and earnings results.
Even amid top-line pressures across the market, FactSet research reports that the tech sector had one of the highest percentages of companies beating revenue targets — 52%, to be exact. As a result, the sector-focused Technology SPDR (ETF) (NYSEARCA:XLK) is up more than 5% year-to-date in 2015 vs. about 3% for the S&P 500 in the same period.
At the same time, Bespoke Investment Group has identified the tech sector as slightly oversold despite some blowout earnings performances by big-name stocks like Apple Inc. (NASDAQ:AAPL) and Netflix, Inc. (NASDAQ:NFLX). This hints that tech stocks are trading at fair prices despite this recent outperformance.
It’s hard to imagine the stock market going up forever, though, and it’s natural to start wondering how you can start getting defensive in this market even as you tap into tech’s potential.
The answer lies in low-risk tech stocks that offer juicy dividends.
After all, what better combination of growth and income is there than a tech stock that provides a healthy yield but can still tap into the big trends of the day?
If this strategy appeals to you, here are five tech stocks to buy now both for the growth ahead and the prospect of attractive dividends.
Tech Stocks to Buy for the Dividends: Digital Realty Trust, Inc. (DLR)
YTD Performance: Flat vs. +3% for the S&P 500
Market Cap: $9 billion
Dividend Yield: 5.1%
Digital Realty Trust, Inc. (NYSE:DLR) is not your traditional tech stock, since it is structured as a real estate investment trust.
But traditional or not, it’s still a pretty direct play on technology.
Digital Realty Trust focuses on data center properties and other high-tech real estate, with tenants ranging from small startups looking for flexibility to stodgy government entities just looking for storage. So while it is a real estate company, at its core it is feeding the Big Data and cloud computing trends of the day by providing much-needed infrastructure.
Of course, like any good REIT, Digital Realty is a dividend machine. DLR stock has been increasing dividends ever since it went public in 2004 — from just under 16 cents per quarter at its debut to 85 cents today, an increase of more than 430% in distributions.
And last quarter, funds from operations totaled $1.56 per diluted share — almost twice the payout, leaving plenty of wiggle room for both sustained dividends and future increases.
With an impressive 5.1% yield, you could do far worse among income investments in any sector right now. And if you want high-tech dividend stocks, DLR is one of the best.
Tech Stocks to Buy for the Dividends: Garmin Ltd. (GRMN)
YTD Performance: -13%
Market Cap: $10 billion
Dividend Yield: 4.4%
Garmin Ltd. (NASDAQ:GRMN) has had its ups and downs lately, with shares down about 25% from 2014 highs. But this rollback may provide investors a good entry point in this high-yield stock, considering its new product lines and future potential.
Garmin is a familiar name among consumers for its GPS navigation tools, but the business has diversified beyond old school consumer gadgets. Garmin is involved in airplane and marine navigation systems, as well as in-dash systems supplied to automakers, including a deal to make the navigation systems for Mercedes-Benz through 2017. There also is a big push into trucking and logistic GPS technology on top of that — something that’s increasingly important to both tracking packages and monitoring fleet vehicles for all manner of businesses.
At the same time, GRMN is seeking out new applications for its technology that include pet location technology for lost dogs, fitness apps for runners, back-up cameras for vehicles and even dash cams. In fact, in many tech circles, a Garmin version of the Apple Watch — the Vivoactive — is shown as a cheaper and more functional alternative for those looking at fitness tracking tools.
Sadly, the legacy GPS business is still in decline and Garmin has some work to do. After GRMN posted disappointing full-year guidance for both revenues and earnings in February, shares fell about 4% in one day, and they’ve been stumbling more ever since, plumbing new 52-week lows.
But keep in mind that while revenue in its auto division dropped year-over-year from $242 million in net sales to $216 million, an 11% drop, revenue in its fitness division rose from $100 million to $131 million — a 31% jump. If Garmin keeps growing here, a good chance amid the fitness wearable craze, it can offset the lost revenue.
Throw in about $2.7 billion in cash and investments over zero debt, and this is a company with a very enviable balance sheet and a decent chance of a comeback.
As for dividends, Garmin is paying out about two-thirds of total profits via is 51-cent quarterly dividend. That’s good for a sustainable yield of about 4.4% at current pricing, and there is room for upside here, too.
Tech Stocks to Buy for the Dividends: Cisco Systems, Inc. (CSCO)
YTD Performance: +7%
Market Cap: $150 billion
Dividend Yield: 2.8%
Cisco Systems, Inc. (NASDAQ:CSCO) has been in the news a lot lately after the announcement that longtime CEO John Chambers will be stepping down in July. His replacement is an internal hire in SVP Chuck Robbins, who has long been rumored to be one of Chambers’ successors, but still the changing of the guard is an occasion to look ahead.
Among the things investors are now looking forward to with optimism — potential acquisitions to bolster the bottom line, continued restructuring to reduce costs and a renewed focus on sales. The result has been a roughly 6% pop in CSCO stock since Jan. 1 — most of that coming in February after strong earnings and a dividend boost, well before the Chambers announcement in May.
This mix of short-term momentum with long-term stability makes Cisco an ideal tech dividend stock. It has reach and scale, with a cash stockpile of about $48 billion and a market cap of $150 billion — and the dividend, while appealing, is only about 45% of CSCO earnings.
Bigger-picture, CSCO stock is in the right place at the right time to benefit from the emergent technology trends of the day. For starters, Cisco’s networking dominance has made it the clear market share leader in cloud infrastructure — the servers and technology that make the cloud possible — with 14% of total revenues in this category to top both Hewlett Packard Company (NYSE:HPQ) and International Business Machines Corp. (NYSE:IBM). And in regards to cybersecurity, Cisco continues to grow ambitiously in this category with efforts that include the well-timed acquisition of Sourcefire in 2013 — and was even recently rumored to be hunting for security firm FireEye Inc (NASDAQ:FEYE).
With a forward price-to-earnings ratio of about 13 a dividend yield of almost 3%, this fairly valued dividend stock is a great way to play the growth in tech but also have some stability and income if things get rocky.
Tech Stocks to Buy for the Dividends: International Business Machines Corp. (IBM)
YTD Performance: +8%
Market Cap: $170 billion
Dividend Yield: 3%
International Business Machines Corp. (NYSE:IBM) is another giant that isn’t going anywhere. With $90 billion to $100 billion in annual revenue and almost $10 billion in cash and investments, like Cisco this stock is one of the titans of tech.
Of course, like Cisco, earnings reports lately have been mixed as the company struggles to grow beyond its current levels. Most recently, in April IBM had a big earnings beat of $2.91 in EPS over just $2.80 in forecasts … but fell short on the top line even as profits topped expectations.
But it’s important to acknowledge that the headwinds have created a lot of negativity in big tech, particularly at IBM. And investors have been buyers recently not so much because of growth expectations (there aren’t any), but because valuations are just too attractive to pass up.
That still remains the case even after a modest rise recently, since IBM has a forward price-to-earnings ratio of just 10.6.
On top of this, IBM has a history of uninterrupted dividend payouts since 1916 — a simply amazing track record. The dividend is very sustainable, too, given that distributions of $1.30 each quarter are only about a third of this year’s estimated earnings.
If and when the global economic environment picks up and boosts IT spending, IBM will reap big benefits. Despite the short-term risk of continued declines, I think long-term investors should give this tech giant a look at current pricing.
Tech Stocks to Buy for the Dividends: China Mobile Ltd. (ADR) (CHL)
YTD Performance: +15%
Market Cap: $290 billion
Dividend Yield: 2.8%
China Mobile Ltd. (ADR) (NYSE:CHL) may be a surprising pick to some investors, given the big volatility in Asian stocks right now. However, keep in mind that CHL stock is up a whopping 15% year-to-date and has strong upside momentum – and despite this, remains fairly valued with a forward price-to-earnings ratio of about 15.6 right now.
Part of the reason CHL has seen such enthusiasm despite uncertainty in China is its combination of stability and growth. This is a state-owned company in the world’s most populous country that boasts a total customer base of about 800 million — about 2.5 times the entire population of the United States!
Yes, Chinese stocks have run up very quickly in a short amount of time, leading some to worry about a pullback. And no, CHL is not immune to volatility despite its scale — since, even in China, you can’t sign up new subscribers forever.
But patient, long-term investors have a lot of potential for income here as the nation gets wired — and as folks upgrade “dumb phones” to smartphones and other mobile devices that use more data, and subsequently result in more fees and revenue for China Mobile.
And also consider that in calendar 2005, the telecom company paid just under 59 cents in dividends – but paid about $2.04 per share in 2014, for a roughly triple the payout in just 10 years’ time. With projected earnings of about $4.50 next year, the distributions are still under half of total profits, meaning this dividend growth will continue.
China Mobile could be a tremendous long-term dividend growth play for those who aren’t afraid of short-term volatility and are eager to tap into this large-cap telecom as an end-around for tech growth in Asia.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at [email protected] or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.