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Investors starved for income may find it in their favorite place: tech stocks

Key Points
  • Historically, technology companies didn't pay dividends because it signaled the growth stocks didn't have any exciting new initiatives to reinvest their cash flow in to drive further growth.
  • In the past decade, the tech sector has grown its dividends about 17% to $88 billion, according to Credit Suisse.
  • "With a scarcity of yield today, investors may be well-served to look to the Tech Sector for both dividend yield and dividend growth," said technology specialist John Talbott at Credit Suisse HOLT. 
JEWEL SAMAD/AFP/Getty Images

For a sector that's typically not known as a dividend play, technology stocks could be a great place to find yield in this world of tumbling rates.

In the past decade, the tech sector has increased its dividend payouts by about 17% to $88 billion, according to Credit Suisse. Apple and Microsoft, two tech giants who have led the payout trend in the sector, returned a combined $27 billion to its shareholders in 2018 alone.

"With a scarcity of yield today, investors may be well-served to look to the tech sector for both dividend yield and dividend growth," Credit Suisse analyst John Talbott said in a note to clients. "Many firms in the space offer decent dividend yields and the ability to grow dividends further given their high sustainable growth rates."

Historically, technology companies didn't pay dividends because they believed it sent a signal that the companies didn't have any exciting new initiatives to reinvest their cash flow in to spur further growth. That singular growth focus made the sector the favorite of investors. Some may look to flee the space as growth slows around the world, but that would be a mistake, some investors say.

"Over time, that has shifted," said Paul Meeks, portfolio manager at Wireless Fund (WIREX) & Independent Solutions Wealth Management. "There are now a group of tech investors ... that are not just looking for the go, go, go, growth. Now it's not necessarily a real black eye if you pay a dividend with a portion of your cash flow."

Slowing global growth, central bank easing and the U.S.-China trade war have caused rates to tumble in the U.S. and even go negative in major countries like Germany. The yield on the 10-year Treasury note fell to its lowest level in three years on Tuesday after a report on the U.S. manufacturing sector showed the industry contracted in August. The moves have caused investors to scan the globe in search of income plays.

The following tech companies were screened by Credit Suisse for their stable and growing dividend. A range of tech hardware, software and semiconductor companies make up the list.

"Tech dividend yield plus buyback yield is really only second to financials," Keith Parker, global market strategist at UBS, told CNBC on Wednesday. "So you have that high yield plus growth, so there is lots of pockets of value plus growth where you can ride out the market volatility against a backdrop of slowing growth and another round of tariffs coming on board in September."

Be selective

Parker warned about lumping all of the big tech names together. "You're much more in the phase of being selective in the tech sector," he added.

Ironically, technology stocks also led the bull market over the past 10 years. However, not all tech names will be good picks during this time of falling rates and volatility.

"We saw some of that last year in the fourth quarter where some of the high-flying tech names sold-off pretty hard," said Parker.

Meeks, a self-proclaimed "value guy that masquerades as a tech investor," arranges his portfolio with companies that can generate dividend in excess of the market and have at least 10% upside to his price target.

Some of Meeks' top picks include Broadcom (3.7% dividend yield), Qualcomm (3.1% dividend yield) and Cisco Systems (2.9% dividend yield).

"I also need to see a growth catalyst ... because if you just hold your nose and buy the highest-yielding stocks in the technology sector or another, then you're going to have a portfolio of AT&T and Verizon," said Meeks.

"They may have high dividends ... but their greatest growth is two decades ago."

The First Trust NASDAQ Technology Dividend Index Fund includes up to 100 technology and telecommunications companies that pay a regular and common dividend. The index has tracked pretty close to the broader market so far this year.

— With reporting from CNBC's Michael Bloom.