Biggest Source of Dividends? Technology
August 31, 2012
Can it possibly be? Technology stocks are paying the most dividends?
Are you ready to tell Aunt Maude and Uncle Herbert in Cedar Rapids that?
At least one asset manager is. First Trust Portfolios of Wheaton, Ill., in August launched an exchange-traded fund whose components solely are technology stocks that pay dividends.
The fund replicates the Nasdaq Technology Dividend Index, with computing companies making up about 80% of holdings and communications companies the other 20%. Each stock must have a dividend payout, or yield, of at least one-half a percent of the stock price a year and not had a decrease in the payout per share in the past 12 months.
"Technology stocks" and "dividends" did not often appear in the same sentence a decade ago. And certainly not a quarter century ago.
Back in the '70s and '80s, utilities were the companies that Aunt Maude and Uncle Herbert counted on to deliver steady and steadily-rising dividends, in their retirements.
But then energy deregulation came. Competition destabilized the utilities, notes Howard Silverblatt, senior index manager at Standard & Poor's. And the new "reliable" payers were financial companies.
The credit crisis of 2008 changed that, of course. Now utilities account for only 6.62% of all dividends paid out and financial services firms 12.63%, so far this year, according to S&P's own tracking of the 500 stocks in its namesake index of stock market activity.
The new leader in the club house, for the first time?
Information technology stocks, at 14.22%. Granted, that's only 1/100th of a percent ahead of consumer staples, as a sector. But, just as Olympic swimmer Michael Phelps has found one-hundredth of a second enough to claim victory, in this case, that's still a win.
"Technology and dividends haven't really gone together,'' in the past, said Ryan Issakainen, exchange-traded fund strategist at First Trust. "But the industry has matured to the point where a number of those companies have a lot of cash and they are finding it just doesn't make sense for them to reinvest in their business because the opportunities that generate better returns maybe aren't as much there as they were in past years."
International Business Machines has been paying dividends since 1967. Hewlett-Packard Co. has been paying dividends since 1992. Microsoft began paying in 2004.
But the linking of technology stocks to dividends picked up in March 2011, when network gear maker Cisco Systems said it was going to start paying a dividend for the first time. Its first dividend, at 6 cents a share, provided a yield of 1.4%.
A year later, the move that snapped heads around was Apple's decision to start paying $2.65 a share, or a yield of 1.8%, in its fourth quarter, which is under way now.
Then, in August, Cisco said it would boost its dividend to 14 cents a share -and Standard & Poor's tally shortly thereafter showed that technology stocks accounted for more dividends being paid out than any other sector.
That, Silverblatt said, showed that the tech companies know how to play by the unspoken rules of investing: Start out below the yields offered by other industries, but move up quickly and consistently. To show you're serious and will be steady payers.
And that you're financially sound.
"Companies want to show they're doing better and there's no better way to do it,'' said Silverblatt. "A dividend is a check in the mail,'' to the Aunt Maudes and Uncle Herberts of the world.
"And every three months, I'll be looking for it again,'' he said.
In the case of the First Trust Nasdaq Technology Dividend Index ETF, investing in component stocks is weighted by the aggregate dividends paid out by companies.
"That's how winning is established,'' said Issakainen.
So the index is weighted toward more mature, larger dividend-paying technology companies. But the fund cannot put more than 8% of its assets into any one company.
The value of shares in the fund hadn't changed substantially, by the last week of August, hovering around $20 each. The high in its short existence: $21. The low: $19.82. On an average day, 50,000 shares are changing hands.
But technology stocks are notoriously volatile. Apple, for instance, was teetering towards irrelevancy and bankruptcy for much of the 1990's. Now, it's set the record for most-valuable company ever. Unless you deflate today's value. Then Microsoft keeps the record.
In any case, the startling run of Apple since the return in 1997 of co-founder Steve Jobs is instructive.
On May 19, 2008, the Standard & Poor's 500 hit a four-year high. Since then, the S&P 500's information technology stocks have appreciated 25.13% in value.
But, Silverblatt notes, if you take out the rise of Apple, the gain would be 4.49%.
And if you go back to 2007, tech stocks would be down. Except for Apple.
Even counting Cisco and Apple, he also notes, technology stocks today only average about a 2.0% yield. That compares to 2.5% for all dividend-paying stocks, on average.
But, given the continuing rise of its stock value, "the dividend is a nice kicker,'' for Apple shareholders, says Silverblatt.
In any event, the times and the dividend payers are changing.
"The bottom line is, tech is a player and a payer,'' said Silverblatt.