Cisco Systems: A Top Dividend Stock for Income-Oriented Investors

Cisco Systems, Inc. (CSCO) has long been a staple in the tech industry, known for its networking hardware and software. However, the company's strategic shift towards software, subscriptions, and services has transformed it into a top dividend stock for income-oriented investors. This article explores how Cisco's strategic pivot, strong balance sheet, and expected growth contribute to its dividend sustainability and appeal.

Cisco's strategic shift towards software and subscriptions has significantly enhanced its dividend sustainability. Between fiscal 2017 and 2021, the company's software revenue grew at a compound annual growth rate (CAGR) of 10%, while subscription-based software revenue rose at a CAGR of 23%. This shift has reduced Cisco's dependence on commoditized networking hardware, with software and services accounting for 53% of its total revenue in fiscal 2021, up from 42% in 2017. Moreover, Cisco expects its product subscription revenue to increase at a CAGR of 15% to 17% through 2025, with subscriptions generating half of its revenue in fiscal 2025. This growth in higher-margin, recurring revenue streams ensures a stable and growing dividend payout for shareholders.

Cisco's strong balance sheet and free cash flow support its dividend payouts and growth. As of fiscal 2021, the company generated $15.7 billion in free cash flow, representing a 10% increase from the previous year. This growth is supported by a CAGR of 10% in software revenue and 23% in subscription-based software revenue between fiscal 2015 and 2021. Cisco's free cash flow payout ratio was a mere 24% in fiscal 2021, indicating ample room for dividend growth. The company has consistently raised its dividend since its first payment in 2011, and it plans to return at least 50% of its free cash flow to shareholders through buybacks and dividends over the next four years.

Cisco's dividend yield and historical performance make it an attractive investment option. As of 2024, the company's forward dividend yield is 2.6%, which is competitive with other tech companies and the broader market. For instance, the S&P 500's forward dividend yield is around 1.5%. Cisco has raised its dividend every year since its first payment in 2011, demonstrating a strong commitment to returning capital to shareholders. Between fiscal 2015 and 2021, Cisco's dividend per share grew at a compound annual growth rate (CAGR) of 11%. This consistent dividend growth, coupled with its competitive yield, makes Cisco an appealing choice for income-oriented investors.

Cisco's expected revenue growth and earnings per share (EPS) growth support its dividend payouts. The company expects its total revenue to grow at a CAGR of 5% to 7% between fiscal 2021 and 2025, a significant acceleration from the 1.5% growth rate between fiscal 2017 and 2021. Additionally, Cisco anticipates adjusted EPS growth at a CAGR of 5% to 7% through 2025. This expected revenue and EPS growth supports Cisco's dividend payouts, as the company plans to return at least 50% of its free cash flow to shareholders through buybacks and dividends. Cisco's dividend yield of 2.6% and low valuation of 16 times forward earnings further enhance its appeal as a dividend stock.

In conclusion, Cisco Systems, Inc. (CSCO) is among the best dividend stocks to invest in due to its strategic shift towards software and subscriptions, strong balance sheet, and expected growth. The company's dividend sustainability, competitive yield, and consistent growth make it an attractive option for income-oriented investors. As Cisco continues to evolve and expand, its dividend payouts and growth prospects remain strong, making it a compelling choice for long-term investors.