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Amid the recent spike in 10-year Treasury yields, technology equities, even large- and mega-caps, have come under duress. As confirmation of that ominous trend, the S&P 500 Information Technology Index is down nearly 7% for the three months ending Oct. 25.
Of course, three months of rough performance doesn’t dent the long-term outlook for the technology sector, by far the largest sector allocation in the S&P 500. The combination of dividends and tech can take some of the edge off the latter and is increasingly attractive despite tech’s low-yield reputation.
In recent years, the group has been one of the leading contributors of S&P 500 payout growth. Owing to robust profitability and strong balance sheets, mature technology companies have ample room to boost dividends. Many have already done just that and will continue doing so.
As detail below, there are compelling reasons to consider tech dividend payers in the current environment.
Margin, Sales Growth Bode Well
As recent third-quarter earnings reports suggest, margin and revenue growth across a variety of sectors is slack, but technology is a notable outlier.
“Despite some tepid results of late, however, technology stocks may seem like an obvious candidate for investment,” according to ProShares research. “Not only are tech stocks forecasted to produce the highest revenue growth of any sector in 2024, but they also produced the highest profit margins in Q2 2023.”
Tech's relevancy as a dividend destination is cemented by the fact that many of dividend-paying names in this sector – Apple and Microsoft being prime examples – fit the bill as quality companies. Yes, it's undeniable that tech is associated with the growth factor and rightfully so, but the sector is also home to a slew of cash-rich, high return on equity, wide moat firms.
Interestingly, those benefits are accessible at tolerable valuations. In fact, the earnings multiples on the S&P Technology Aristocrats Index are noticeably lower than those found on some other tech-heavy benchmarks.
“The valuation multiples of tech stocks have climbed steadily since the rally began earlier this year. They now stand at a lofty 35x trailing earnings, which is meaningfully higher than their 10-year average of 24x,” adds ProShares. “Asset allocators who are seeking attractively priced growth at what seems like a market inflection point face a potential dilemma.”
Profits Are Fashionable
It’s not a stretch to say that profitability is always in style, but there are times when shares of money-losing companies captivate investors’ hearts, minds and dollars. This isn’t one of those times and high interest rates are seeing to that.
Fortunately, the S&P Technology Aristocrats Index serves as an efficient avenue for locating profitable tech companies with the means to support current dividend obligations and grow those payouts over the long-term. In fact, dividends with tech are highly appropriate today because many tech members of the S&P 1500 Composite Index are not profitable firms.
“One potential way to find profitable tech stocks with mature business models is by looking for companies with growing dividends. Increasingly, the tech sector is one of the market’s largest sources for dividends and has grown its dividends at the fastest rate,” concludes ProShares.
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