While the tech industry is commonly associated with stock buybacks rather than dividends, Meta Platforms surprised investors with its recent announcement of initiating a dividend. Traditionally, information technology companies have offered one of the lowest yields among the S&P 500 index sectors, standing at approximately 0.7%. However, income investors now have the opportunity to find growing dividends within the tech sector, with a few stocks even boasting attractive yields, reaching as high as 3%.
A Shift in Perception
Dan Ives, a senior equity analyst at Wedbush specializing in tech companies, believes that paying dividends is no longer considered taboo in the world of tech. In fact, he suggests that Meta is following in the footsteps of Apple, which has successfully implemented a dividend strategy. This approach is gaining popularity as it appeals to income-focused investors.
Tech Dividends: Room for Growth
However, despite this shift, there is still ample space for more tech companies to offer dividends. A report by Goldman Sachs’ portfolio strategy team reveals that less than 40% of tech companies in the broader S&P Composite 1500 currently pay dividends, compared to nearly 75% that engage in buybacks.
The Examples to Follow
While Apple’s stock yields 0.5%, lower than the S&P 500’s average of about 1.5%, the company primarily focuses on buying back its common stock rather than paying dividends. In the last three months of 2023 alone, Apple spent $20.1 billion on stock buybacks and only $3.8 billion on dividends. Nevertheless, Apple has consistently increased its dividend payments, albeit at a modest rate.
Similarly, Microsoft currently yields only 0.7%. However, it has regularly grown its dividend by approximately 10% each year. As a result, it has become a prominent example of a technology company with both the capacity and willingness to expand its dividend over time.
Overall, the introduction of dividends within the tech sector reflects a changing landscape. With income investors seeking opportunities for stable returns, more tech companies are likely to follow suit, offering attractive dividends in addition to potential long-term growth.
Barclay, an experienced investor, focuses on companies with a strong financial foundation, healthy profit margins, and consistent cash flow. As of December 31, the information technology sector made up the largest portion of his fund, accounting for 18.5% of the total.
Within the technology industry, Barclay has identified semiconductor capital-equipment suppliers like KLA and Lam Research as reliable sources of double-digit dividend growth. Although their stock yields are modest at around 1%, there has been a significant increase in dividend payments. For example, KLA’s quarterly dividend has risen by almost 12% from $1.30 to $1.45 per share. Similarly, Lam Research increased its quarterly disbursements from $1.725 to $2 per share, demonstrating a 16% boost.
Furthermore, two tech companies with higher dividend yields are IBM at 3.6% and Cisco Systems at 3.1%. Barclay highlights the importance of networking and security, stating that they are fundamental to the strategies of many chief information officers. With a steadfast reputation in the industry, Cisco possesses a valuable franchise. The company has steadily raised its quarterly dividend payments, most recently reaching 39 cents per share. On the other hand, IBM, benefiting from the artificial-intelligence boom, has also been able to raise its quarterly payout slightly from $1.65 to $1.66 per share. This positive development is expected to contribute to IBM’s dividend growth.
Interested investors can explore the S&P Technology Dividend Aristocrats Index to capitalize on tech dividends. This index consists of 36 equally weighted stocks that have increased their dividends for at least seven consecutive years. While well-known tech giants such as Microsoft, Apple, and Oracle are part of this index, it also includes smaller-cap companies like Dolby Laboratories with a market cap of approximately $7.6 billion, and Roper Technologies valued at $59 billion. These stocks currently offer yields of 1.5% and 0.6% respectively. To track the performance of the Tech Aristocrats, investors can consider the ProShares S&P Technology Dividend Aristocrats exchange-traded fund.
In conclusion, the technology sector presents compelling investment opportunities. Companies like KLA, Lam Research, IBM, and Cisco Systems offer attractive dividend growth prospects. The S&P Technology Dividend Aristocrats Index and its associated exchange-traded fund provide additional investment options. For those interested in navigating the technology sector and capitalizing on its potential, there are diverse avenues to consider.
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