Technology companies were once the great growth stocks of the 1990s, and are now emerging as the high dividend-growth stocks of late, with more companies shelling out payouts than ever before in a boom that’s likely to benefit from the Federal Reserve’s ongoing accommodative monetary policies.
In a broad sense, the so-called quantitative easing has fed investors’ appetite for risky assets, and the tech sector in general—along with many other sectors—are likely to continue to benefit from the upside momentum that has helped broad U.S. equities benchmarks climb to record-high territory.
“Certain stock market sectors are potentially poised for more upside than others as the Fed’s actions filter into the economy,” Viktoria Palushaj, market analyst at Citrin Group, told IndexUniverse. “As economic activity continues to pick up steam, cyclical growth industries such as autos, housing, technology, and financials will consistently profit from stronger economic fundamentals.”
But what the Fed-driven easy money era has also fueled is a hunt for yield-producing investments at a time when income from the more traditional bonds is compressed due to ultra-low interest rates. Many tech stocks are emerging as good sources of dividend payments, displacing to some extent defensive sectors of the economy, such as utilities, that have long been heralded for their dependable dividends.
Since 2011, the information technology sector has seen roughly a 19 percent increase in the number of companies paying dividends, according to S'P Capital IQ data—a rise that “has not been lost on investors,” Dylan Cathers, equity analyst with S'P Capital IQ, said in a research note recently.
“Slowly but surely, dividends are becoming a more common characteristic of technology stocks,” Cathers said.
Moreover, the yield on tech names within the S'P 500 Index has increased in the past 2 1/2 years, while the yield is down for names in the telecommunications services or utilities sectors, he noted.
“Part of the attraction to technology names in general is the cyclicality of the companies,” Cathers added. “If the economy is in the early stages of an upswing, these names will likely benefit. Now that many of these stocks are paired with attractive dividend yields, it makes them worth consideration by a wider group of the investing population.”
Funds Worth Watching
For ETF investors, funds like the First Trust Nasdaq Technology Dividend Index Fund (TDIV) are emerging as a good access point to that growth trend.
Compared with other tech funds in the space, such as the Technology Select Sector SPDR (XLK) or the iShares S'P Global Technology Sector ETF (IXN) or even the “Q’s,” TDIV’s exposure is slightly different because of its focus on dividend payers.
TDIV, now a $166.6 million fund, owns technology and telecom names, and weights securities within each group by total dividends paid over the previous 12 months, a methodology that allows the fund to allocate more heavily to the biggest dividend payers. The fund’s current dividend yield is 2.19 percent.
By comparison, XLK’s portfolio, which only picks names from the S'P 500 universe, tilts heavily toward large-caps in the segment, and is currently serving up a dividend yield of 1.8 percent.
iShares’ IXN, meanwhile, covers the top 70 percent of the overall global market capitalization in the tech segment, doing a good job of capturing the global technology market, but the fund does not focus on dividend-paying names. IXN’s current dividend yield is 1.2 percent.
From a performance standpoint, TDIV is also standing out. While XLK and IXN have seen year-to-date gains of 11.6 and 9.2 percent, respectively, TDIV is up more than 18 percent since the beginning of the year.
“Because the recovery will take time, a prolonged low-interest-rate environment should still retain support for higher-yield investments within the asset class such as defensive dividend strategies,” Palushaj said.
Don’t Forget Utilities
Utilities are also interesting to investors, as they offer higher income with lower volatility relative to other dividend stocks, she said.
“Utility companies are reliable in their business model and service demand irrespective of how the economy is performing,” she said. “Aging baby boomers and new health care reform have provided some potential for health care stocks, but these gains are more long term relative to faster earnings potential from utilities.
“As long as the Fed remains accommodative, positive price potential for the overall market is unlimited and favorable across all industries, regardless of the actual economy,” she added, pointing to the importance of keeping sector exposure diversified. “Sector distinctions are less relevant in such a risk-on environment that keeps driving the market higher.”
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