×

The surprising trend of tech stocks and dividends

Nasdaq market site
Scott Mlyn | CNBC

Apple's market valuation and outsized earnings made it an inevitable choice to be added the Dow Jones Industrial Average.That the company is also one of the market's biggest potential dividend payers didn't hurt.

"Establishing a dividend puts you on a track to look and feel like a grown-up company," said Nicholas Colas, chief market strategist at Covergex.

"It is sort of like trading in your jeans and hoodie for khakis and a button-down shirt," he said. "You put it off for a while, but most people give in eventually."

In the early wave of the tech boom, not paying a dividend was a badge of honor. As Sun Microsystems co-founder Scott McNealy notes, 15 years ago companies and tech investors were purely focused on growth.

"We always had to reinvest in new tooling and new chip designs," he said. "Our product life cycles were a year and a half."

McNealy said that for the new wave of cloud-based tech companies—like his new social-media service firm Wayin—the costs of retooling tend to be lower.

"So, you tend to mint money," he said.

But it is the old-line tech firms, along with Apple, that are minting bigger dividends for investors.

Rise of tech dividends

Over the past three years, the tech sector has been the biggest contributor to dividend payouts in the S&P 500, edging out financials. Tech accounts for nearly 15 percent, up from just 3.6 percent at the height of the tech bubble in 2000. Financials now account for 14.6 percent, down sharply from nearly 30 percent in 2007 before the end of the financial crisis.

Read MoreNasdaq 5,000: The cure or curse for biotech stocks

Still, Howard Silverblatt, senior index analyst at S&P Dow Jones Indices , thinks it's a stretch to say tech stocks are attractive to investors in search of safe haven with income.

"Few dividend people are buying tech or buying Apple for the dividend, even though they're paying more. Tech is a lot more volatile," he said.

Yet in an era when activist fund managers are pressing companies holding large amounts of cash to provide returns to shareholders, growth isn't enough for larger investors. And that's true for the tech-heavy Nasdaq, as well as the blue chips.

"They're looking and saying, 'We need to reward our shareholders in a variety of different ways. We want to appeal to a broad spectrum of shareholders,'" said John Jacobs, former executive vice president of Nasdaq, who helped launch the Nasdaq 100 exchange-traded fund, known as the PowerShares QQQ Trust, in 1999.

Now, half of the companies on the Nasdaq 100 pay dividends. Predictably, some of those firms with the highest yields aren't tech firms, such as Mattel, Wynn Resorts and Kraft. All three are also down for the year, but tech firms like Seagate Technology have established strong dividend growth track records.

The Nasdaq's dividend yield is about half what blue chip indexes pay. The Dow Jones Industrial Average and the S&P 500 pay roughly 2 percent, while the yield on the Nasdaq Composite and Nasdaq 100 are about 1 percent.

Cough up that cash, Apple!

Top Nasdaq Dividend Yielders

Company
Dividend Yield
Mattel 5.80%
Vodafone 5.20%
Wynn Resorts 4.30%
Equinix 3.90%
Kraft 3.50%
Garmin 3.80%
Seagate Technology 3.70%
KLA-Tencor 3.20%
CA 3.00%
Paychex 3.00%
Source: FactSet

"A German bund 30-year pays 1.0 percent. So you can buy the Nasdaq for the same yield as a German 30-year and get the same coupon," noted Covergex's Colas.

For plenty of fast-growing cash-producing firms like Google and Facebook—where billionaire CEO Mark Zuckerberg famously still wears hoodies—growth still trumps dividends with many investors.

Read MoreWhy dividend stocks are still your best friend

Yet when it comes to growth, Apple is in a class by itself. Its record cash level could reach $200 billion this year, and large investors are pressing the tech giant to return a big chunk of it to investors.

"When the cash levels get enormous, the story changes," Colas said.

Analysts expect Apple will announce plans for returning cash to shareholders in April. If the company chooses to boost its dividend, it could be a help to the dividend yields of the Nasdaq 100, the S&P 500 and now the Dow as well.

But S&P's Silverblatt isn't so sure. Apple, like many firms, has committed more cash toward share buybacks than dividends. Longer-term, there's a big difference—like dating as opposed to getting married.

"A dividend is a cash flow commitment," he said, and violating that commitment can be exceedingly costly.