Verizon, IBM, and Cisco are all cheap income plays in this frothy market.
When it comes to tech stocks, investors often focus on glitzy growth plays that attract a lot of attention from Wall Street. However, all that buzz can drive the prices and valuations of those stocks to record highs — which sets them up for steep drawdowns as elevated interest rates and other macro headwinds chill the market.
As the NASDAQ trades just a few percentage points shy of its all-time high, it might be smart to ignore the market darlings for now and buy a few blue chip tech stocks that trade at cooler valuations and pay healthy dividends. These three stocks fit that description: Verizon (VZ 4.14%), IBM (IBM 5.17%), and Cisco (CSCO 0.84%).
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1. Verizon
Verizon’s stock sank to a 13-year low of $28.25 on Oct. 13, 2023. At the time, the telecom giant was struggling to gain wireless customers and slashing its prices to stay competitive. But as of this writing, its stock has bounced back to nearly $44.
Verizon’s business recovered as it more than doubled its annual postpaid phone net additions in 2024. That acceleration was driven by the localization of its incentives and marketing campaigns, the expansion of its customizable “myPlans,” and the growth of its distribution business with Walmart. It also expanded its prepaid wireless segment by acquiring TracFone, while its total wireless churn rate declined 50 basis points to 1.62% for the full year. For 2025, it expects its wireless revenue to rise 2% to 2.8%. Analysts expect its total revenue and adjusted earnings per share (EPS) to both rise 2%.
As Verizon’s wireless business warmed up again, it trimmed its spending to offset the pressure from its promotions. Its free cash flow (FCF) rose 6% to $19.8 billion last year and easily covered its $11.2 billion in dividend payments, and it still pays a forward yield of 6.3%. That high yield, along with its low forward price-to-earnings ratio of 9, should limit its downside potential and make it a safe place to park your cash and earn some extra income.
2. IBM
IBM was once considered a stagnant tech giant that was left behind in the seismic shift toward cloud-based services. But under Arvind Krishna, its cloud chief who became its CEO in 2020, Big Blue’s business gradually recovered.
Krishna took over, IBM spun off its slow-growth managed IT infrastructure services business as Kyndryl, and expanded its open-source software subsidiary Red Hat’s presence in the hybrid cloud and AI markets. Instead of going head-to-head against the public cloud giants, IBM aimed to carve out a niche with AI-powered services that could be wedged between the private and public clouds. It also pruned its workforce as it used AI to automate more tasks and trim its spending.
From 2020 to 2024, IBM’s revenue and EPS increased at a compound annual growth rate (CAGR) of 3% and 1%, respectively. Those growth rates might seem anemic, but they represent a significant improvement after it endured years of top- and bottom-line declines. That’s why its stock price more than doubled over the past three years.
Analysts expect its revenue and EPS to both grow about 4% this year as the macro environment stabilizes. Its stock still looks reasonably valued at 23 times forward earnings, and it pays a forward dividend yield of 2.7%. It only paid out 52% of its FCF over the past 12 months as dividends, so it still has plenty of room to raise its payout.
3. Cisco
Cisco, one of the world’s largest networking companies, struggled in fiscal 2021 and 2022 (which ended in July 2022) as supply chain constraints throttled its sales of routers, switches, and wireless networking devices. In fiscal 2023, its growth accelerated again as it resolved those supply chain issues and its customers ramped up their purchases of new networking hardware again.
In fiscal 2024, Cisco’s revenue and earnings both declined because many of its customers had accumulated too many of its products in the previous year — and the intensifying macro headwinds throttled the deployment of those devices. As a result, its orders stalled out as its existing customers sat on too many uninstalled products.
However, analysts expect Cisco’s revenue to rise 5% in fiscal 2025 as it overcomes those inventory issues and ships more devices. They expect its adjusted EPS to stay nearly flat, but that pressure can mainly be attributed to its initial costs of integrating Splunk, the network observability services provider it acquired last March.
Cisco’s stock still looks cheap at 17 times forward earnings, and it pays a forward dividend yield of 2.6%. It only spent half of its FCF on its dividends over the past 12 months. Its business should stabilize after it fully laps its acquisition of Splunk and it normalizes its inventory levels — so I believe it’s still a reliable choice for conservative investors.
Leo Sun has positions in Verizon Communications. The Motley Fool has positions in and recommends Cisco Systems, International Business Machines, Kyndryl, and Walmart. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
