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When it comes to sector-level equity income, many market participants, including advisors and retail investors, have been wired to think technology is not where the dividends are at. The scant trailing 12-month dividend yield of 0.89% on the S&P 500 Technology Select Sector Index affirms as much.
Advisors know that the sectors with the sturdiest, longest-running dividend reputations are consumer staples and healthcare and when it comes to big yields, utilities carry the day. However, tech is an increasingly prominent player on the dividend stage and that’s good news for advisors and clients alike.
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.
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.
For Tech Dividends, Change Is Good
In the case of the marriage of dividends and tech stocks, change is good…good for investors.
“Today, a larger portion of the technology sector is made up of well-established companies that have mature business models, attractive growth rates and margins, strong balance sheets, and relatively low levels of debt,” according to ProShares research. “S&P reports that almost half of all tech stocks within the S&P Composite 1500 are now generating plenty of cash and rewarding shareholders with dividends—up from 25% in 2011.”
The proof of tech’s rising dividend supremacy is in the pudding. In terms of dollars paid by the dividend stocks in the S&P Composite 1500 Index, 16% of those dollars were attributable to tech stocks. Only the financial services sector accounted for a greater percentage. Said another way, tech payouts contribute more to that index’s dividend picture than the communication services, materials and utilities sectors COMBINED.
What’s compelling about tech dividends is that the sector’s payout kings are showing long-term commitment to shareholder rewards and they have the financial firepower to grow those payouts without straining balance sheets and research and development efforts.
Speaking of Dividend Growth…
To paraphrase an old golf quip, dividend yield is for show, dividend growth is for dough. Meaning long-term payout growth is critical to investor outcomes.
Of course, it’s always nice when companies rapidly raise their payouts, assuming they can afford to do so. Tech has been doing just that, enhancing its dividend proposition in the process.
“In fact, tech companies in the S&P 1500 have more than quadrupled the dollar amount of their dividends through 2020 as compared with what they paid in 2011,” concludes ProShares. “This growth rate is the highest of any sector, and it has far exceeded the 9.7% dividend increase for the S&P Composite 1500 as a whole over the same period. And with this index’s tech sector dividend payout ratios currently at only 35%, we believe there is ample room for continued growth.”