Advisors that have been in the business for some time, particularly those that were around before and during the infamous 2000 Tech Bubble, know that for all its fine points, the technology isn't the first sector folks think of when they think of dividends.
Based purely on yield, technology still doesn't grab the attention of many income hunters. As of March 26, the S&P 500 Technology Index and the tech-heavy Nasdaq-100 Index yield 0.89% and 0.54%, respectively. Those numbers make the 1.47% dividend yield on the S&P 500 look good by comparison.
However, the payout profile of technology is changing for the better. Today, the sector is the largest dividend payer in dollar terms with the help of Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT), among others. That's a plus for advisors serving income-needy clients at a time low bond yield and an improving dividend environment.
Talking Tech Dividends
For advisors seeking a basket of cream of the crop, a good place to start is with the S&P Technology Dividend Aristocrats Index – the technology offshoot of the popular S&P 500 Dividend Aristocrats Index. Due to the fact that the marriage of tech and dividends is a relatively new phenomenon, the tech aristocrats benchmark requires a minimum payout increase streak of seven years while the watermark for the standard aristocrats index is a payout increase streak of 25 years.
“The S&P Technology Dividend Aristocrats Index, which targets well-established, technology-related companies that have not just paid dividends, but consistently grown them for at least seven consecutive years,” according to ProShares research. “Holdings are primarily companies from the information technology sector. They may also include technology-related companies in the communication services and consumer discretionary sectors, which may cover internet direct marketing retail, interactive home entertainment, and interactive media and services.”
As noted above, the requirement for entry into the index is a dividend increase of at least seven years. However, as of March 1, 32 of the 38 components exceed that minimum. In fact, 10 companies in the gauge have payout hike streaks spanning at least 15 years.
The index yields 1.03% – hardly high-yield territory. However, that's very much the point with technology dividends. High dividends often seduce, but those payouts can be backed by financially strained in danger of delivering negative dividend action to conserve cash. Conversely, some members of the S&P Technology Dividend Aristocrats Index are among the most cash-rich companies in Corporate America, confirming they can not only sustain today's dividend obligations, but grow those payouts for years to come.
Another Benefit for Advisors to Mull
It'd be reasonable to assume that index devoted to tech dividend payers would be something along the lines of 20% allocated to just Apple and Microsoft. Albeit sensible from a market capitalization perspective, that strategy increases clients' exposure to single-stock risk.
For its part, the S&P Technology Dividend Aristocrats Index is equally weighted – an approach that reduces individual equity risk.
“The index’s requirement for seven years of consecutive dividend growth points to the historical strength and stability of its constituents. And the S&P Technology Dividend Aristocrats is equally weighted, which means index performance is not overly dependent on just a few large holdings,” according to ProShares.
Investments cannot be made directly in indexes, but advisors can access royalty-level tech dividend stocks with the ProShares S&P Technology Dividend Aristocrats ETF (CBOE:TDV).
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