3 Top Dividend Stocks in the Server Industry

By Andrew Tonner Markets Fool.com

Servers are, in many respects, the backbones of technology industry. They serve as critical infrastructure on which a host of other functions rest. Considering their importance, it should come as no surprise that the server market is one of the largest sub-industries in all of tech; global server sales totaled $14.6 billion in Q4 2016, according to research firm IDC.

Continue Reading Below

Cloud computing is undoubtedly changing the industry, but the leading server manufacturers remain several well-known tech companies. In this article, we'll look at three dividend-paying, large-cap stocks that investors interested in the server market should consider.

Image source: Getty Images.

Hewlett-Packard Enterprise

It is the world's largest server provider, and servers sales constitute the single-largest revenue contributor among Hewlett-Packard Enterprises'(NYSE: HPE) six reporting sub-sections, accounting for $14.0 billionof the IT giant's $50.1 billion FY 2016 sales. Like the rest of the market, Hewlett-Packard Enterprise's server sales have remained fairly static, declining just 0.7% from 2015 to 2016.

For those unfamiliar with it, the company was formed from the 2015 split of the iconic tech conglomerate Hewlett-Packard. HP Inc. was created to house the PC and printer division, which remain in secular decline, while Hewlett-Packard Enterprise was created to hold the more promising businesses. However, looking at current analyst estimates, it isn't immediately clear that those businesses are, in fact, more promising.

Continue Reading Below

Wall Street analysts see the company's 2017 estimated sales falling 28% and its FY 2018 revenue declining a further 17%.Interestingly, this kind of sales attrition did not reveal itself in HPE's most recent 10-K filing; FY 2016 total revenues fell a mere 3.8%.As such, investors considering buying HPE for its income-producing abilities should keep in mind that many observers widely expect its business to gradually deteriorate in the coming years. Buyer beware.

In terms of its dividend stats, HPE yields slightly less than the market average of 1.94%. The company raised its dividend in December, so its shares yield 1.28% on a trailing-12-month rate basis, and 1.48% on a forward basis. It also enjoys plenty of room for future rate increases -- HPE's payout ratio sits at just 12.6% -- though its revenue growth outlook profile remains a critical consideration for anyone looking at HPE stock.

International Business Machines

Unlike HPE, the dynamics at International Business Machines'(NYSE: IBM) server business better reflect the on-the-ground reality of the server industry. IBM organizes its sales of its three main server products under the umbrella of its Systems reporting segment. For its fiscal 2016, sales of IBM's physical servers plummeted 21.8% to $5.9 billion. This might seem dire, but it's important to remember that cloud computing and IBM's various software-as-a-service offerings still rely on servers to power their systems. In fact, IBM's cloud revenues grew 49% in 2016 to a run rate of $5.8 billion, or roughly the same size as IBM's current server sales base. Said another way, IBM's shifting business model hasn't eroded the server as a key driver of its sales. Rather, the rise of cloud computing means IBM is selling server-powered software to customers, rather than physical servers themselves.

In terms of its dividend payments, IBM shares currently yield 3.2%,well above market averages. The company has done an admirable of job steadily increasing its payouts as well. Though not a Dividend Aristocrat, IBM has increased its annual cash payments for 17 consecutive years. It also bears noting that IBM has been one of the most active companies in corporate America in terms of rewarding its shareholders through stock buybacks as well. So, while IBM doesn't command the same kind of server market share as HPE, the company's continued progress in its ongoing business pivot and above-average yield make it one of the more appealing income-producing stocks to appear on this list.

Intel

Another interesting dividend play tied to the server industry could be investing in one of the suppliers that provides hardware components to the industry at large. If that's your flavor, then chip giant Intel (NASDAQ: INTC) is perhaps your best bet.

Intel is widely acknowledged to control an estimated 99% of the server microprocessor market, making it a proxy for the industry as a whole. As such, companies that make and sell physical servers to customers, like HPQ and IBM, use Intel chips to power their products. However, major cloud computing providers -- like Amazon, Alphabet, and others -- also use Intel server chips to power their respective cloud infrastructures. As such, investing in Intel can be seen as a nice way to invest in the industry growth as a whole, while saving the headache of having to determine which specific server manufacturer will perform the best.

Seasoned tech investors will also recognize Intel as one of the industry's best-known dividend stocks. Though fairly mature from a sales growth perspective, Intel handsomely rewards its shareholders through cash distributions and stock buybacks. Intel's current dividend yield sits at a respectable 2.9%. Its 49% payout ratioshould give the company the flexibility to continue to raise payouts in the future as well. And while not a Dividend Aristocrat -- Intel missed raising its dividend as recently as two years ago -- the company has demonstrated a general commitment to growing its dividend. As just one example, Intel's cash distributions grew from just $0.07 in its FY 2000 to $1.04 in its FY 2016. So, while Intel doesn't directly produce servers, its shares can still be an interesting way for investors to generate dividend payments from the server industry all the same.

10 stocks we like better than Intel
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now...and IBM wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of April 3, 2017.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Andrew Tonner has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A and C shares) and Amazon. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.