Patient investors have it easy. They can beat the market with a simple three-step approach: finding high-quality companies with decades of solid growth prospects ahead, picking up some stocks from these stocks, doing absolutely nothing else for years and years, ignoring the occasional downturn like that. Carefully selected market beaters increase in the long run. Income investors just need to add one more criterion to their stock selection model: focus on stocks that pay a reliable dividend.
You can put this super simple strategy to work in any sector you want. It even works at times like these, where another COVID-related market crash is just around the corner. In the tech sector, for example, you could build a high-yield dividend portfolio around IBM (NYSE: IBM), Taiwan semiconductor manufacturing (NYSE: TSM)and Seagate technology (NASDAQ: STX) right now. They are all equipped to survive the next market crisis and prosper later, and all offer generous dividends.
Image source: Getty Images.
Lots of Big Blue money
Computer veteran IBM generated $ 11.5 billion in free cash flows in the past four quarters. The company turned around and poured $ 5.8 billion of that reward directly into shareholders’ pockets through dividend payments.
That happened in a year when Big Blue spent $ 34 billion on the purchase of Red Hat. A less shareholder-friendly company would have halted its dividend policy at times like these, but not IBM. Instead, the company settled for symbolic dividend increases of 3.2% in 2019 and 0.6% in 2020.
I can’t think of a company with a stronger commitment to reliable dividends than IBM. Payments have multiplied by nine in the past 15 years, even if the company had to finance dividend checks with loans in the mid-2000s.
We are seeing a fantastic ATM whose dividend policy to generate wealth has been a top priority for decades. Looking to the future, Big Blue sees great growth opportunities in the cloud computing, blockchain, data security and artificial intelligence markets.
The shares are for sale at the moment, having fallen 11% in the first half of 2020. The drop in prices also drove IBM’s dividend yield to 5.5%. I plan to take advantage of IBM’s generous dividend for decades to come, and you could do the same.
Substantial storage
The manufacturer of hard drives and solid state devices (SSD) Seagate cannot compete with IBM’s unwavering dividend approach, but income investors still love this action. Pay increases may be a little less reliable than IBM’s, but they also tend to be larger. Here’s how Seagate’s payments compare to Big Blue’s in the past 15 years:
Data from IBM Dividend by YCharts.
Seagate can also match IBM’s 5.5% dividend yield pound for pound. The total dividend budget totaled $ 679 million in the past year, funded with $ 1.2 billion in free cash flows. Seagate also invested $ 1.2 billion in share buybacks in the same period, which is another way to send excess cash to shareholders.
This company links to many of the same long-term growth markets as IBM but from a different angle. The business world generates massive amounts of data every day, and Seagate’s low-cost storage devices are perfect for storing those valuable bits of data until the company is ready to analyze them. The rise of Internet of Things devices will only accelerate this trend in the next decade or so. Your smart devices won’t be equipped with Seagate hard drives, but the cloud servers that process and store your data certainly do.
Seagate is feeling so good about its market position that the company increased its dividend for the first time in four years in 2019. The stock is looking cheap right now, trading 20% lower to date with a valuation of just seven times the final earnings. Seagate should continue its generous buyback policy for the duration of that discount before transferring some of those funds to additional dividend increases in 2021 and beyond.
Invest in income with a chip on your shoulder
The independent Taiwan Semi chip foundry is an acquired taste of American dividend investors. Predictable dividend increases raise the best of the best American revenue investments in the rest of the pack, and many companies (like IBM and Seagate) lean back to keep up payments.
It is different in markets like Europe and Taiwan. Dividends are still great and warmly received by shareholders around the world, but Taiwan Semi is under no obligation to protect its payments through thick and thin. This frees the company to make large capital investments as needed without worrying too much about supporting the dividend policy.
These dividend payments increase when times are good and decrease when infrastructure investments claim a large portion of Taiwan Semi’s incoming cash flows. The resulting graph seems unfamiliar or even scary if you weren’t aware of the company’s more flexible attitude toward solid payments:
TSM Dividend data by YCharts.
The company invested 95% of its operating cash flows in capital expenditures in the last quarter.
“Every year, our capital spending [capital expenditures] It is spent in anticipation of the growth that will follow in the coming years, Chief Financial Officer Wendell Huang said in Taiwan Semi’s first-quarter earnings call. “While the impact of the COVID-19 virus creates short-term uncertainties, we expect the multi-year megatrends of 5G and HPC-related applications to continue to drive strong demand for our advanced technologies in the coming years.”
The company is investing heavily in infrastructure to support the next accelerated growth based on 5G networks and high-performance computing. The dividend was restored to a lower level this year, but Taiwan Semi is making a rare commitment to steady dividend growth from this low point.
“With our rigorous capital management, we remain committed to sustainable cash dividends both annually and quarterly,” said Huang.
In other words, payments will increase annually for the foreseeable future, and investors should not be concerned about sudden drops in payments from one quarter to the next. The current return stops at 3%, which is significantly higher than the average return of about 2% on the S&P 500 stock index. This is another income-generating stock for the ages.
