It pays to be boring
The downside? Tech stocks don't become dividend darlings without being seen by some as "over the hill." Many of the tech stocks that have increased dividends have been underperformers relative to the broader tech universe, so for an investor focused on technology sector growth, the dividend-rich stocks aren't the best play.
Google isn't pressured to dish out dividends, because it can still grow earnings rapidly. If Apple was still growing fast, nobody would care about its dividend, said Josh Peters, editor of the Morningstar Dividend Investor. "This is the process of carving up value," Peters said. "There's no reason that Apple should be sitting on that huge pile of cash." It currently totals more than $40 billion.
Technology companies are also new at paying dividends, and many lack solid dividend-paying track records. "They don't have long-term stability locked in," Peters said.
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Indeed, not every investor buys into the idea that mature tech firms resemble mature consumer product companies.The fate of a company in the tech sector can change quickly, which makes relying on them for dividends a riskier bet than a traditional dividend sector play, said Soren Christensen, CEO of Advanced Wealth Advisors in Naples, Fla. Technology is still mostly a cyclical sector, and as a result, even if dividend-rich tech stocks look like blue chips, Christensen doesn't consider them to be true defensive plays.
"During downturns, these stocks will suffer," Christensen said, since they make products that people don't necessarily need. The technology sector is littered with companies like Nokia and BlackBerry that missed key consumer trends.
Barry Fennell, Lipper senior research analyst, countered that many tech stocks increasing dividend payouts are much more predictable than they were a decade ago when it comes to cash flow, revenue forecasts and expenses. Better visibility and above-average growth prospects relative to other traditional conservative sectors, such as chemicals, make a compelling case for the technology stock-dividend focus.
"It's a classic business model where the companies grew rapidly and then reached maturity and ... then you have to think they might become more of an automotive-type business, all about stealing or maintaining market share and holding on as long as they can," Fennell said.
And that's a thesis increasingly attractive to large mutual fund managers. "If you are comfortable with more predictable growth, tech stocks are certainly more attractive than most sectors in the S&P 500 right now dividend-wise," he added.
Some technology ETFs and tech mutual funds now even have yields higher than the S&P 500, a sign of how much dividends have increased in tech stocks, but the more cautious way to play the trend is probably the wise one.
"If you're an equity income–oriented investor, you need some exposure to the tech sector being 15 to 25 percent of S&P 500, and those companies will continue to pay out," Fennell said. "That would be the way to go."
