Conventional wisdom holds that technology stocks are not a good choice for investors interested in dividend income. If your clients want dividends, shares of Facebook, Twitter and many other tech newbies wont make the cut.
Yet technology stocks should be part of a balanced portfolio -- and many have long histories of dividend payments. The Computing-Tabulating-Recording Co. paid its first dividend on April 10, 1913 -- 11 years before it changed its name to International Business Machines. A century later, IBM had a yield of 2.1% as of Dec. 31, 2013 -- slightly above the 1.98% yield of the S&P 500 index. (Part of the reason for the higher yield was a slight decline in the share price in 2013, although IBM also boosted its dividend last year.)
In large part, the idea that technology companies dont pay dividends took hold during the late 1990s. During the dot-com bubble, many tech firms shunned dividends. With their share prices climbing daily, managers and boards of these corporations saw no need to pay cash to stockholders.
The bursting of that bubble in 2000 -- and the 2003 tax cut on dividends -- changed the conversation in technology. In 2003, Analog Devices, Microsoft and Qualcomm got the ball rolling for many companies in the sector by initiating dividends.
Today, 44 of the 65 information technology stocks in the S&P 500 index pay out cash to their shareholders -- and at the end of 2013, 22 had higher yields than the benchmark index. According to S&P Dow Jones Indices, the IT sector contributes 15.35% of the indexs indicated dividend -- the largest contribution of any of the 10 sectors. And that percentage has increased in each of the past three years.
One thing tech companies share with peers in other sectors: Most dividend payers are found among the larger-capitalization issues. Among the 71 tech stocks in the S&P MidCap 400 index, 23 pay dividends, and only nine recently yielded more than 2%. In the S&P SmallCap 600, there are 123 tech stocks; 23 pay dividends and seven had yields above 2%.
HOW TO INVEST
If you want to offer your clients a diversified mix of dividend-paying technology stocks, the pickings are slim. Screening Morningstars fund database for technology sector funds that have yields above the category average and a star rating of four or five turns up seven funds. Only one has a yield above 1%, and that one has an expense ratio almost as high as its yield. Whats more, just 54% of its holdings are in tech.
Things are slightly better on the ETF front. The Technology Select Sector SPDR Fund (XLK) had a 30-day SEC yield of 1.71% as of the end of 2013. Its expense ratio is a low 0.18%. It holds the stocks in the information technology sector of the S&P 500, including those that dont pay dividends; the funds second-largest holding is non-payer Google.
Worth noting: Many people dont realize that XLK is not a pure play technology fund. Because the S&P 500 telecommunications services sector consists of only six companies -- a number too small to form a separate fund -- XLK also includes those telephone companies. That helps to boost its yield. (And considering the high-tech nature of todays phone service, the blending is not without justification.)
Another tech ETF choice might be a better fit for clients specifically seeking technology dividends. The First Trust NASDAQ Technology Dividend Income Fund (TDIV) also holds telecom stocks, which are limited to 20% of the ETFs weighting. All holdings must be traded on major exchanges and have a yield of at least 0.5%. They may not have cut their dividends in the past 12 months. Expenses are higher, at 0.50% -- but at 2.53%, the SEC yield is, too.
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