Tech stocks for dividends no longer a joke

Here’s a proposition that should produce gales of laughter from your clients: Consider tech stocks for dividends.

The thing is, tech stocks can be a great source of dividends backed by some of the nation’s strongest companies. If you can stop your clients from deleting you from their contacts list once you raise the topic, you should consider looking at tech dividends.

Long ago, when technology companies made floppy disks for desktops, they looked at dividends the way your kids probably look at, well, a floppy disk. Tech companies preferred to reinvest cash in the company or buy back stock.

But that’s changed. When it comes to paying out dividends today, the technology sector of the Standard & Poor’s 500 ranks second behind financials. And during the financial crisis, tech stocks were the top dividend payers as firms sought to compensate shareholders for depressed prices.

CASH KING

And that’s one reason to like tech dividend payers: Most have enough cash to keep their dividends flowing for years, even in times of financial turmoil. Microsoft (MSFT) is the cash king, with a $102.6 billion horde, while Cisco (CSCO) is sitting on $59.1 billion and Oracle (ORCL) has $52.3 billion.

Microsoft increased its dividend during the financial crisis, as did Intel (INTC), Qualcomm (QCMM) and Seagate Technology (STX). Oracle started paying dividends in May 2009, just after the stock market’s bottom. Most of these companies have robust stock buyback programs as well, although those buybacks are often offset by employee stock option programs.

Another reason to like tech dividends is the yield. The average tech stock that pays dividends has a 12-month yield of 2.55%, according Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. While that’s well below the average yield on utility stocks, it’s just 8 basis points below the average yield in the financial sector. (And it’s well above the current 10-year Treasury yield).

Within technology, it’s fairly easy to get yields of 3% or more. Symantec (SYMC), Cisco, Intel and IBM (IBM) sport dividend yields north of 3%. Naturally, you should be wary of very high yields in technology, as in any sector. Garmin (GRMN), HP (HPQ) and Seagate all have yields above 5%, and it’s not because the companies feel they have too darn much money. All three were clobbered last year, and that has continued, to varying degrees, this year.

The biggest argument against tech dividends is the industry’s record of catching Ebola when the stock market sneezes. Here again, however, dividends lend a hand. At the moment, there’s one tech dividend exchange-traded fund: First Trust NASDAQ Technology Dividend Index Fund (TDIV), which yields 2.65%.

So far this year, the fund is down 5.62%, versus a 12.92% loss for tech funds in general. The fund’s three-year standard deviation — higher is more volatile — is 12.77, versus an average 15.03 for the typical tech fund.

At the moment, most big, dividend-paying tech stocks have fairly low price-to-earnings ratios. The S&P 500’s PE is currently about 16, while Cisco, IBM, Intel, Apple (APPL) and Qualcomm are all below 16. Microsoft, oddly, is the exception, with a PE of 36.35, according to Morningstar Inc.

BIGGEST DRAWBACK

The biggest drawback to dividend tech stocks is they generally lag when the tech sector is on fire. After all, the hallmark of a tech rally is young companies that barely have revenue, let alone cash to pay a dividend. For example, the Technology Select Sector SPDR ETF (XLK), the biggest tech ETF, gained 5.49% last year, while First Trust NASDAQ Technology Dividend Index Fund fell 6.4%.

A client probably would laugh you out of the room if you suggested an all-technology dividend strategy, and rightly so. Any income strategy should be a mix of asset classes, and certainly not a single stock sector.

On the other hand, as tech stocks mature, you can expect more of them to start doling out more cash to investors, and not just buying back stock. Alphabet (GOOG), formerly known as Google, for example, is sitting on $73 billion in cash. It’s probably not going to spend it all on self-driving cars. And while you wait for new tech companies to join the dividend club, you shouldn’t overlook the current members.