Market Pulse: Technology — the new versus the old
Watching CNBC, there is a lot of talk of equity rotation from “new technology” to “old technology.” This rotation was on full display last week after earnings reports from Microsoft and Apple.
Microsoft announced that its cloud-based “Office 365” revenues doubled from last year. Better yet, Apple announced it will boost its quarterly dividend by 8 percent and increase its share-buyback program.
While new technology (social media, 3D printing, etc) offers growth potential, today’s investors prefer the more predictable earnings and attractive yields from the larger well-established technology stocks.
Dividend payments from the technology sector were unthinkable in the 1990s. Back then, if a technology company announced a dividend, it was interpreted as a sign that the company was out of growth ideas.
Times have changed. In a near zero interest rate environment, cash-rich technology companies are responding to the needs of investors. Intel yields 3.4 percent, Cisco Systems yields 3.3 percent, Microsoft yields 2.8 percent, and IBM yields 2.0 percent.
There is an easy way to own dividend paying technology stocks. The First Trust Nasdaq Technology Dividend Index ETF (TDIV) owns 89 dividend payers, each with a market capitalization of $500 million or more.
After Apple’s dividend announcement, it became the ETF’s largest stock holding and represents 8.5 percent of the portfolio.
In addition to the companies listed above, other holdings include Qualcomm, Oracle, Texas Instruments, Hewlett-Packard, and AT&T. The ETF’s 30-day SEC yield is 2.7 percent.
Thanks to “old technology” companies, the tech sector is now the biggest contributor to S&P 500 dividend growth. That doesn’t mean income investors should automatically buy the dividend payers.
After all, their track record of dividend increases is limited. That said, the dividend payers are performing far better than the newer technology companies that must continually innovate and surprise in order to survive. Increasingly, today’s investors prefer stability and income from their investments.
As long as interest rates stay low (think years) dividends will be important.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.