Investors searching for dividends rarely look among the swashbuckling denizens of the tech sector for their payouts. But maybe they should.
Stocks in the information technology sector of the S&P 500 will contribute 15.1 percent of more than $627 billion in annual dividends expected from companies in the index this year—second only to financial stocks.
Tech-stock dividends are “getting more attention now because of Meta and Google and the other high-profile companies that initiated dividends this year. But it’s a trend that’s been pretty long in place in the tech world,” says Thomas Huber, portfolio manager of T. Rowe Price Dividend Growth. Huber notes that Microsoft started paying dividends in 2003 and that Apple reinstated one in 2012.
If a high dividend yield is your priority, you’ll find some suitable tech stocks, but not many. The sector yields an average 0.65 percent, the lowest yield of all 11 sectors of the S&P 500. Instead, technology dividend payers are more aligned with investors looking for a reasonable yield but with a focus on growth—in earnings, cash flow and dividends.
Look for a payout that’s well covered. A low payout ratio (the percentage of earnings paid out in dividends) is an indication that a company has the wherewithal to cover its distribution. “I’d say 20 percent to 25 percent is a reasonable level,” says Huber, who notes that Alphabet and Meta initiated dividends with a super-low payout ratio of approximately 10 percent. (The S&P 500 has a payout ratio of 35 percent, and the long-term average is more than 40 percent.) In the tech world, says Huber, “payout ratios tend to start small. If you’re an investor, you can benefit from growth in earnings and cash flow, but also over time, in the payout ratio. It’s a supercharged level of growth.”
But tech stocks that pay dividends offer some unique portfolio diversification attributes that both income investors and tech-stock fans might appreciate. Dividend investors knee-deep in utilities, financials or real estate, for example, might want to balance out their sector exposure, while some tech investors might prefer the cushion of a dividend in an often-volatile corner of the market.
“Dividend increases are a key indicator of management telling you they have confidence going forward—it’s a prudent way to engage with tech for dividend-oriented folks. It’s also a lower-volatility approach to tech for someone not focusing on dividend growth in other parts of their portfolio,” says Simeon Hyman, global investment strategist at asset manager ProShares.
