The Motley Fool: Cisco can ride the tech waves and still deliver dividends

The Motley Fool Take

Networking giant Cisco Systems (NASDAQ: CSCO) is a stable and mature tech company, but it has been suffering from weak demand for its switches and routers that keep information flowing through the internet. That has put downward pressure on sales growth and on its stock price, offering investors an attractive opportunity.

Cisco’s future is promising, as it’s making steady progress in its transition away from switching and routing and toward a business more focused on software and subscription services. This should drive accelerating growth and profitability, and profit margins have already been rising.

Cisco is also building its “Internet of Things” offerings, using its networking and switches technology to improve connected servers in manufacturing, utilities, oil and gas, transportation and smart cities.

The company sports far more cash and cash equivalents than debt, and it’s generating more than $12 billion annually in free cash flow. This enables it to ride the ups and downs of the economic cycle without peril.

Cisco started paying dividends in 2011, and it has increased payments every year since then. This includes a generous 24 percent hike in 2016, leaving the stock with a dividend that recently yielded 3.6 percent.

With dominant market share in an infrastructure-oriented business, a rock-solid financial position and a reasonable valuation, Cisco Systems has a lot to offer investors. (The Motley Fool has recommended Cisco Systems.)

Ask the Fool

Q: What are “naked calls”? - H.W., Saginaw, Michigan

A: They’re an options-investing strategy. Remember that there are two main kinds of options: calls and puts. Buying a call gives you the right to buy a set number of shares, at a set “strike” price, within a certain period of time (often just a few months). Puts give you the right to sell shares.

You sell (or “write”) naked calls when you don’t own the underlying stock. It’s risky because if the stock soars, you may have to buy it at the new, high price, to deliver it to whoever bought the call you sold. You can potentially lose a lot. Of course, if the stock doesn’t pass the strike price before the option expires, you pocket the price of the option. That’s the appeal of this strategy.

You can be more conservative with a covered-call strategy, where you sell a call only if you own the underlying stock and are willing to part with it, if need be. You don’t lose any money this way, but if you end up having to hand over your shares, you do lose profits you might have made if you’d kept the stock. Many options strategies are risky, and you can do quite well investing in stocks without ever going near options.

Q: Where can I find the quarterly and annual earnings reports companies file with the Securities and Exchange Commission (SEC)? - C.S., St. Augustine, Florida

A: You can get them from the SEC itself, at sec.gov/edgar.shtml. You can also call the company’s investor relations department and ask for its latest filings - or poke around the company’s website or many major financial websites.

My Dumbest Investment

In 2007, I received a “hot tip” flier in the mail about an internet company that provided games and learning activities for mothers to use with young children. I purchased about 50 shares for around $30 apiece. After the stock dropped to $15 per share, I doubled down in order to lower my cost basis. When shares fell to around $6, I again bought more.

After many more such purchases, I had lowered my cost basis to just a dime per share! I had spent a lot of money on commissions by this time, of course. I owned 44,958 shares at a cost of $4,654! The stock was trading at around $0.0002 per share then. If it went up to just $0.02, I would see a couple hundred dollars “profit” in my account - but there was no way that I could sell 44,000-plus shares.

Mercifully, the stock finally dropped to $0, and I stopped buying shares. It’s still in my portfolio, as a reminder to buy falling stocks only if I think they’re a better value, not to lower my cost basis. - R.G., Nantucket, Massachusetts

The Fool responds: You learned a tough lesson. Many times, stocks plunge for good reason - and permanently. Once it was in penny-stock territory, that should have been another red flag. Focus on a stock’s intrinsic value and growth prospects, not on your purchase price.