Beware Cisco: Tech Dividend-Payers Underperform

Cisco’s Chief Executive John Chambers may want to think twice about initiating a dividend, if history is any guide.

Tech stocks in the Standard & Poor's 500 Index that pay a dividend have underperformed technology stocks with no payouts over the last one, three and five year periods, according to data crunched by Bespoke Investment Group. The most extreme margin was over the last 12 months, where dividend-paying tech stocks are up a measly 2 percent, while the non-payers have surged 21 percent, according to Bespoke.

“Investors are still placing big-cap tech in the growth bucket and they are misunderstood,” said Michael Block, chief equities strategist for Phoenix Equities. “Microsoft should be seen as a big scarecrow to this whole theme of big tech paying dividends. You hear that Apple ?”

Shares of Cisco , which had its analyst meeting Tuesday, popped after Chambers said the company will pay out a dividend yield of between one and two percent in its 2011 fiscal year. The shares are still down more than 9 percent in 2010, underperforming an S&P 500 that is slightly up on the year.

Tech companies “pay dividends because they are running out of ways to increase growth and don’t want to make acquisitions that are game changers,” said Stephen Weiss of Short Hills Capital.

The numbers are even more damning the bigger the dividend yield gets, according to Bespoke. Nine of the technology stocks in the S&P 500 with a payout above the 10-year Treasury yield, including Intel , have rarely outperformed the rest of tech or the market in the last five years.

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