Tech Stock Dividends Are Changing Income Investing

Alphabet, Meta, and Salesforce are all paying dividends to their shareholders, so what does this mean for technology investing more widely?

Bella Albrecht 20 May, 2024 | 3:31PM
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Megastocks Alphabet (GOOGL), Meta Platforms (META), and Salesforce (CRM) have announced their first-ever dividend payouts, joining a growing number of smaller tech stocks that are now rewarding investors with payments.

While the yields offered by most tech names are relatively small, their potential to grow dividend payouts along with earnings over time is attractive for many investors focused on dividend growth. This is changing the complexion of dividend growth strategies away from financials and other slower-growing companies.

By way of a case study, tech stocks have increased from 2.3% of the Morningstar US Dividend Growth Index (made up of securities with a history of uninterrupted dividend growth and the capacity to sustain that growth) in 2003 to 18.0% at the end of 2023.

With market returns driven in recent years by big-tech names and growth stocks more broadly, this dynamic is filtering into dividend growth investing. As big-tech stocks such as Meta and Alphabet issue dividends, income strategies now "have access and exposure to those names that have driven the market more recently." So says Matt Quinlan, lead portfolio manager for the $3.9 billion (£3 billion) Franklin Equity Income fund and the $27.4 billion Franklin Rising Dividends fund.

Tom Huber, portfolio manager for the $24.4 billion T. Rowe Price Dividend Growth fund, thinks this trend still has more room to go. "There will be more and more opportunities for dividend growth investors to buy technology stocks," he says.

For investors, however, there is one possible catch. While the trend means dividend growth strategies may capture more of the overall stock market gains, it could also lessen their appeal as portfolio diversifiers.

"The inclusion of the big names [Meta, Alphabet] in any sort of dividend indexes or dividend growth indexes is very likely to increase their correlation with the broad market," says David Harrell, editor of the Morningstar Dividend Investor newsletter.

Tech Stock Dividend Trends

For the most part, technology companies and growth stocks typically do not take the cash they generate and send it back to investors through dividends. Instead, that cash is reinvested in the business to fuel additional growth or returned to investors through share buybacks. Still, the announcement of dividends by key big-tech companies extends a long-term trend.

"You saw it first with semiconductors," says Quinlan, who points to Texas Instruments (TXN) issuing its first dividend in 1985, Analog Devices (ADI) paying out in 2003, and Broadcom (AVGO) following suit in 2010.

"These companies have attractive financial models that generate tremendous cash flow," he explains. "They can both invest in the business and reinvest to maintain those competitive positions, while also paying dividends."

The Morningstar US Target Market Exposure Index, which measures the performance of the top 85% of the investable universe in the United States by market cap, has also seen a modest influx of dividend-paying tech stocks. In 2008, 22 stocks in the index were tech dividend payers. By 2015, that number had grown to 41. At the end of 2023, there were 47.

10 Dividend Paying Tech Stocks

As of April 30, 2024, here are the 10 dividend-paying tech stocks with the largest weight in the Morningstar US Target Market Exposure Index:

• Microsoft [MSFT];
• Apple [AAPL];
• Nvidia [NVDA];
• Alphabet [GOOGL];
• Meta Platforms [META];
• Broadcom [AVGO];
• Salesforce [CRM];
• Cisco Systems [CSCO];
• Accenture [ACN];
• Qualcomm [QCOM].

More Names, But Low Dividend Yields

Though more tech stocks are paying dividends, the yields are low. The Morningstar US Technology Index has the smallest forward dividend yield out of all the Morningstar sector indexes, at 0.72%. Excluding real estate, the two highest-yielding sectors are utilities, at 3.44%, and energy, at 3.10%.

Huber says the low yield is partly due to the mindsets of management teams at big tech companies. "It takes time for the companies to get to a point where they understand they are grown up, mature, and generating more cash than they need," he explains. Dividends are a commitment, he notes. "Once you start, you certainly don’t want to cut, and ideally you grow." Additionally, he says some firms worry that paying dividends will signal to investors that they do not expect strong growth to continue.

Within the Morningstar US Target Market Exposure Index, the average forward dividend yield is 1.14%. The highest-yielding stock is Cisco, at 3.42%, and the lowest-yielding is Nvidia, at just 0.02%.

Furthermore, while all the stocks in the group have grown the dividend dollar amount paid out annually over the past 10 years, only Qualcomm, Cisco, and Broadcom have grown their yields. Accenture, Microsoft, Apple, and Nvidia have seen their yields fall significantly.

Soaring share prices and modest dividend increases have driven them down over time, as a yield is a function of a stock’s price. Nvidia is the most extreme example, as its yield shrunk by 34.09% from 2013 to 2023 on an annualised basis while its share price surged 61.89%.

Dividend Growth vs Dividend Income Strategies

Dividend strategies typically fall into one of three categories: income, growth, or a blend.

Dividend income strategies are generally focused on high-yielding companies, Quinlan says, whereas dividend growth strategies focus on companies that can "significantly and consistently increase their dividend over time."

The Franklin Rising Dividends fund, a dividend growth fund, holds 22% of its portfolio in tech stocks, with names like Microsoft, Roper Technologies (ROP), Accenture, Texas Instruments, and Analog Devices in its top 10 holdings.

"All of those would be examples of businesses that we like that have attractive growth in terms of their ability to grow the business and have innovative new products to drive capital appreciation over time," says Quinlan. Additionally, he believes that "their dividend payments, in terms of the per share amounts, will continue to go up." The T. Rowe Price Dividend Growth fund also holds 22% in tech stocks, with Microsoft and Apple holding the top two spots in the portfolio.

Looking at income strategies, tech stocks are not as widely held. The Morningstar Dividend Yield Focus Index, which tracks stocks with attractive dividend yields and strong financial quality, is 8% tech stocks. This is less than half the amount of the Dividend Growth Index. The average yield on stocks within the dividend yield focus index is 3.98%, higher than the yield on any single tech stock in the Total Market Exposure Index.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Bella Albrecht  is associate data journalist at Morningstar

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