Tech stocks took a beating in 2022. In many cases, pandemic-era valuations that were overly optimistic were simply brought back down to earth. But in other cases, shares of good companies paying sustainable dividends were hammered to the point of pushing up dividend yields to record levels.
Semiconductor giant Intel (INTC 0.84%) and telecom company AT&T (T -0.22%) each face their fair share of challenges in 2023 and beyond, but dividend investors would be remiss to ignore these high-yield tech stocks.
For much of the past two years, shares of chip giant Intel have been slumping under the leadership of CEO Pat Gelsinger. Gelsinger has set in place an expensive strategy for Intel to double-down on manufacturing, regain undisputed leadership in its core CPU markets, and build its own world-class foundry business. It's been slow going, and the market hasn't been a huge fan.
With Intel stock down more than 60% from its multi-year high, the dividend yield has shot up to unprecedented levels. The forward dividend yield sits at around 5.7%, more than triple the yield of the S&P 500. Investors shouldn't expect any real dividend growth for at least the next few years for two reasons. First, because the PC industry is going through a severe downturn that's putting pressure on Intel's financials. And second, because Intel is pouring all available cash flow into its growth initiatives. Intel will spend $21 billion on capital expenditures this year, which will push free cash flow into the red, and spending will remain elevated through 2024.
Intel is aiming to become a major player in the foundry business, challenging market leader TSMC. For that to happen, the company must play some serious catch-up on the manufacturing technology front. Intel plans to aggressively roll out new process nodes over the next few years, which should not only close the gap with TSMC, but also improve the competitiveness of its own products.
Intel has maintained the dividend so far, and the company appears committed to keeping it at the current level. However, given the amount of spending Intel has planned and the uncertainty surrounding the economic environment, there is at least some risk that Intel eventually cuts the dividend to free up cash. That risk seems low, but it's not zero.
Intel's turnaround efforts should make some serious progress in 2023. The company will launch its long-delayed Sapphire Rapids server chips in January, put pressure on rival AMD with its Meteor Lake PC chips, roll out its second-generation Battlemage discrete graphics cards, and continue marching toward its goal of building a foundry business. Assuming, of course, that there are no more delays.
For investors, Intel's high-yield dividend is a nice incentive to stick around and let the comeback play out over the next few years.
With AT&T fully unwinding its media empire, the telecom giant can now focus on growing its wireless and fiber businesses. While a tough economy is putting some pressure on the company's results, it's having no trouble winning customers.
AT&T added 708,000 net postpaid phone subscribers in the third quarter, along with 338,000 net fiber connections. Wireless service revenue jumped 5.6% year over year, while fiber growth pushed overall broadband revenue up 6.1%.
The company expects to generate $14 billion of free cash flow in 2022, an outlook that was reduced earlier this year partly due to customers delaying payments. That's normal customer behavior in tougher economic times, so it should be nothing to worry about. But it does temporarily reduce how much cash AT&T is bringing in. AT&T cut its dividend after it spun off WarnerMedia, a necessary move to bring the dividend payout down to a sustainable level following years of costly media acquisitions. The company now pays a quarterly dividend of $0.2775 per share, which works out to a forward dividend yield of about 6.1%. Based on the current share count, the dividend will eat up about $8.5 billion over the next year.
AT&T's results should be more predictable now that the company has shed its media assets, although a potential recession next year could certainly sting a bit. The good news is that wireless and home internet are necessities for most people. Customers may delay upgrading their smartphones, which would reduce AT&T's equipment revenue, but churn shouldn't be a huge problem.
AT&T's free-cash-flow guidance for this year easily covers the dividend payments, and free cash flow should rise in the coming years as investments in 5G and fiber pay off, and as the company realizes the benefits of cost reductions. The company originally expected its 2023 free cash flow to be around $20 billion, although that number may be a bit optimistic given the state of the economy. Still, there's plenty of room to grow free cash flow over time.
As with Intel, AT&T investors shouldn't expect significant dividend hikes anytime soon. AT&T is still working on paying down a mountain of debt accumulated from its media deals, and that effort will likely take priority. But it's hard to pass up a dividend yield that tops 6%.