Dividends in tech stocks are worth checking out

VaselineAugust 31, 2024

0 5 minutes read

Dividends in tech stocks are worth checking out

Dividend-seeking investors rarely look for payouts among the glittering denizens of the tech sector. But maybe we should.

Information technology stocks in the S&P 500 will contribute 15.1% of the more than $627 billion in annual dividends expected from index companies this year — second only to financial stocks. (Services, the quintessential dividend sector, will contribute just 5.5%). There’s also a growing contribution from so-called tech-plus companies — those that don’t fall into S&P’s official info-tech group, but which investors often include under a broad umbrella of “tech stocks “.

Meta Platforms ( META ) — formerly Facebook — online travel site Booking Holdings ( BKNG ), software firm Salesforce ( CRM ) and Google parent Alphabet ( GOOGL ) have all initiated dividends this year. Annual payouts among the four range from $35 per share for Booking, or about $1.2 billion in total, for a recent yield of 0.94%, to 80 cents per share for each of the three classes of Alphabet shares, or nearly $10 billion in total. Alphabet’s publicly traded stock yields about 0.46%, in line with Meta’s 0.42%. Salesforce shares yield 0.62%. (Returns and other data are as of July 31 unless otherwise noted; recommended investments are in bold.)

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Dividends in tech stocks “are getting more attention now because of Meta and Google and the other high-profile companies that have initiated dividends this year. But it’s a trend that’s been around for quite some time in the tech world,” he says Thomas Huberportfolio manager of T. Rowe Price Dividend Growth Fund (PRDGX).

Huber notes that Microsoft ( MSFT ) began paying a dividend in 2003 and that Apple ( AAPL ) reintroduced one in 2012. “I would say if you’re a dividend investor, you’re not out of the picture in the tech world,” he says . . Two technology stocks even discount the S&P 500 Dividend Aristocrat Index, which requires members to have 25 years of consecutive dividend growth for inclusion: International Business Machines (IBM), with a yield of 3.5%, and Roper Technologies (ROP), with a yield of 0.55%.

The idea that tech stocks are generally reluctant to pay dividends for fear that it would mean no more growth companies is “absurd,” says Huber, who notes that a new generation of tech companies are looking to maintain growth while return some cash to shareholders. “As these companies have matured, they’re generating a lot more money than they need to invest in the business,” he says.

Share buybacks are also a popular way for tech firms to return cash to shareholders. Alphabet, for example, authorized $70 billion share buyback when it declared its dividend. But companies can waver in their commitment to share buybacks, and as indicators of strong financials, buybacks don’t match dividends, he says Simeon Hymanglobal investment strategist at asset manager ProShares.

“Companies that announce a share buyback are telling you they had a good year last year,” he says. When a company initiates or increases a dividend, “it’s telling you that it has confidence in the future. Nobody likes to cut a dividend – that’s the worst thing you can do as a company.” But the worst sometimes happens, even in the field of technology. Intel ( INTC ) said in July it would do so is suspending its dividend in a cost-cutting move which included further belt-tightening and massive layoffs. The chipmaker has struggled to compete in an AI-focused environment.

What to Look for in Tech Stock Dividends

If a high dividend yield is your priority, you will find some suitable tech stocks, but not many. The sector has an average yield of 0.65%, the lowest among all 11 sectors in the S&P 500. In contrast, tech dividend payers are more aligned with investors looking for a reasonable yield but with an emphasis on growth – in earnings , cash flows and dividends.

Look for a payment that is well covered. A low payout ratio (the percentage of earnings paid out in dividends) is an indication that a company has the means to cover its distribution.

“I would say 20% to 25% is a reasonable level,” says Huber, who notes that Alphabet and Meta have initiated dividends with a very low payout ratio of around 10%. (The S&P 500 has a payout ratio of 35%, and the long-term average is more than 40%). In the tech world, says Huber, “pay ratios tend to start small. If you’re an investor, you can benefit from the growth in income and cash flow, but also over time, the payout ratio is a supercharged level of growth.”

Dividend strategies have required patience from investors this year, remaining significant in a stock market dominated by a handful of tech giants, most of which — until recently, anyway — have avoided dividends. And tech stocks tumbled in a summer slide as investors ditched the market’s high-flyers amid worries about the strength of the economy and growing skepticism about how quickly a massive investment in artificial intelligence (AI) will pay off for the industry.

But dividend-paying tech stocks offer some unique portfolio diversification attributes that both income investors and fans of tech stocks might appreciate. Dividend investors knee-deep in utilities, financials or real estate, for example, might want to balance their sector exposure, while some tech investors might prefer the dividend cushion in an often volatile corner of the market.

“Dividend increases are a key indicator of management telling you they are confident about the future – it’s a prudent way to engage with technology for the dividend-oriented. It’s also a low-volatility approach to technology for someone who doesn’t focus on increasing dividends in other parts of their portfolio,” says Hyman.

How to invest in tech stocks that pay dividends

T. Rowe Price Dividend Growth is a member of the Kiplinger 25, our list of favorites. no load mutual funds. Although the fund can invest in any sector, technology stocks, at 24.5% of the portfolio in the last report, represent the largest chunk of assets. With an expense ratio of 0.64%, the fund has returned 17% over the past year, trailing the S&P 500’s 22% gain.

The ProShares S&P Technology Dividend Aristocrats ETF (TDV, $76), with expenses of 0.45%, is an exchange-traded fund that invests in technology-related companies that have increased their dividends for at least seven consecutive years. Its 12-month yield is 14%.

As for individual stocks, Huber says it’s bullish Microsoft ($418, yield 0.72%) and Apple ($222, 0.45%). “I can’t argue that they’re cheap, but they check all the other boxes – strong balance sheet and cash flow, healthy outlook.” Investors can consider buying on the dip, he says, or buying a starting position and building over time.

Other actions he likes include Analog devices (ADI, $231, 1.6%) and Microchip Technology (MCHP, $89, 2.0%). Both companies, with heavy exposure to industrial end markets, make relatively inexpensive analog chips that are built into things we use every day, Huber says.

Actions in IT consulting Accenture (ACN, $331, 1.6%) have struggled of late, creating an opportunity for long-term investors, analysts at CFRA Research say. CFRA recently upgraded the stock to Strong Buy given Accenture’s “strong fundamentals, market leadership and growth profile.”

Note: This article first appeared in Kiplinger Personal Finance Magazine, a monthly, trusted source of advice and guidance. Subscribe to help you earn more money and keep more money you earn Here.

VaselineAugust 31, 2024

0 5 minutes read

Vaseline

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