Until recently, very few technology stocks paid a dividend to shareholders. But after the bursting of the “dot-com” bubble in the late 1990s and the Great Recession of 2007-2009, investors have urged more tech companies to share the wealth.
Many tech companies have obliged, and pay dividends to shareholders. There are still some holdouts, such as Amazon (AMZN). Amazon has never paid a dividend, and investors awaiting a dividend from Amazon will likely be an exercise in patience. While Amazon remains a top growth stock, investors looking for dividends should consider other tech stocks.
Western Digital (WDC) is a large-cap tech stock with a high dividend yield above 4%. It is not likely to produce the same kind of growth as Amazon, but it is a highly attractive stock for income investors.
Business Overview And Recent Events
Western Digital is a technology hardware manufacturer. It produces data storage products, such as hard disk drives (HDDs) and solid-state drives (SDDs). Western Digital also operates a flash memory segment. The stock has a market capitalization of approximately $13.7 billion.
Storage is a difficult area of the technology industry, due to its price cyclicality. Western Digital has experienced weak pricing in recent months, although 2018 was a highly successful fiscal year for the company. Revenue increased 8% to $20.6 billion, a company record. Adjusted earnings per share soared 60% on a non-GAAP basis.
The company expects 2019 to be more challenging, due mainly to weak pricing in HDDs and flash, but the long-term trend looks favorable for Western Digital. The company’s products are required for many technological items like personal computers, external storage devices, and cloud storage solutions.
Western Digital holds a top position in the HDD industry, with Seagate Technologies as its only major competitor. It also has a strong position in SDDs, thanks to its flash memory exposure. Western Digital invested over $2.4 billion in research and development in fiscal 2018, to maintain its competitive advantages.
A Rare High-Yield Tech Stock
Investors primarily interested in growth within the tech industry should stick with Amazon, which continues to grow sales and cash flow at a rapid pace. But Amazon is not likely to pay a dividend any time soon. It continues to spend heavily to maintain and expand its core retail business, as well as a multitude of additional growth initiatives.
Still, there are other options for investors wanting dividend income from the tech sector. Of the 300+ dividend-paying tech stocks, the majority have yields of 3% or less. This makes Western Digital a rare stock in the tech industry, as it currently offers a 4.2% dividend yield.
Western Digital can provide such a high dividend payout because it does not need to invest as much as other tech companies to grow its business. While this inherently gives it a lower level of growth potential, the company provides a dividend yield more than twice the S&P 500 Index average. Even if 2019 amounts to a challenging year, Western Digital’s dividend payout appears secure. The company generated free cash flow of $3.4 billion in fiscal 2018 while paying $593 million in dividends last fiscal year. As a result, Western Digital had a dividend payout ratio of just 17% in fiscal 2018, in terms of free cash flow. This indicates Western Digital’s free cash flow would have to decline substantially for the dividend to be in any real danger.
Final Thoughts
Investors can find more tech stocks paying dividends than ever. Growth is still the priority in the tech industry, but many companies with high free cash flow can afford to return cash to shareholders through dividends. Western Digital is a rare high-yielder in the tech sector, with an attractive 4.2% yield.
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