October 12, 2020 BARRON’S 31
INCOME INVESTING
Tech’s Dividend Allure
Is in Growth, Not Yield
T
he tech sector, un-
like utilities or con-
sumer staples, isn’t
the first option for
dividend investors.
Low yields tend to
have that effect.
The 72 technology companies in
the S&P 500 index yield about 1%,
on average, compared with 1.7% for
the full index.
But the group is no slouch when it
comes to raising dividends. As of
June 30, the tech companies in S&P
500 had more than doubled their
second-quarter dividends, to $5.37 a
share, compared with what they paid
five years earlier, according to S&P
Dow Jones Indices. That was the
highest growth rate of any sector and
far exceeded the 34% increase for the
S&P 500.
“The thing we like about tech stocks
is that we see a lot of runway for them
to grow the dividends, first and fore-
most,” says Mike Barclay, co-manager
of the $24 billion Columbia Dividend
Income fund (ticker: LBSAX). Its five-
year annual return of 11.03% beats that
of 97% of its peers in Morningstar’s
large-cap value category.
As of Aug. 31, its two top holdings
were behemoths Microsoft (MSFT)
and Apple (AAPL). Cisco Systems
(CSCO) was in its top 10, as well. At
that time, technology was by far the
fund’s biggest sector weighting at
24.2%.
Columbia Dividend Income doesn’t
focus entirely on payouts, instead tak-
ing a total-return approach that com-
bines dividends and capital apprecia-
tion for stocks. Those two goals go
hand-in-hand for long-term investors.
“If you’re an investor who really
needs the income from a dividend,
you do have to have confidence that
the underlying fundamentals are there
to support that,” Barclay says. “A com-
pany that doesn’t have growing cash
flow can finance the dividend off its
balance sheet only for so long.”
Microsoft and Apple have plenty
of cash to support their dividends,
but their stocks sport low yields.
Microsoft, recently trading around
$209, has a quarterly payout of 56
cents a share, yielding 1.1%. Apple
shares were recently around $115,
paying a quarterly dividend of 20.5
cents a share and yielding 0.7%.
Still, there’s more to a dividend
stock than its yield, says Barclay: “If
you had the temerity to buy [Micro-
soft] in July of 2013 when it was at
$33, that $2 of annual income [today]
is pretty nice.” His fund has held
Microsoft since 2004, the year after
the company initiated a dividend.
As the accompanying table illus-
trates, dividend investing can be a
trade-off between yield and growth.
Higher-yielding stocks tend not to
increase their payouts quickly, if at all,
while lower-yielding names often fea-
ture better dividend growth.
Consider that Microsoft and Apple,
the two lowest-yielding stocks on that
list, have two of the best total returns
in 2020 among this group of compa-
nies. Both increased their payouts
this year, Microsoft by 10% just last
month. Another strong performer
has been chip company Qualcomm
(QCOM), which yields 2.1%. It has
returned nearly 40% this year.
But some of the higher-yielding
names, notably IBM (IBM) and Cisco
Systems, have notched negative
returns in 2020.
In some cases, however, investors
can have the best of both worlds—a
nice yield and strong capital apprecia-
tion. One company in this category
is Texas Instruments (TXN), which
yields around 3% and has gained
about 15% this year, dividends in-
cluded. Ditto for chip maker Broad-
com (AVGO), which sports a yield of
3.5% and has returned 20%.
Taking a step back, thetechnology
sector does pose concerns, one being
lofty valuations that have come along
with rising share prices during the
pandemic. The Technology Select
Sector SPDR fund (XLK) was recently
trading at about 25 times what its un-
derlying holdings are expected to earn
next year, according to FactSet. That’s
well above its five-year average of 17.6.
However, Keith Lerner, chief market
strategist at SunTrust Private Wealth
Management, is overweighting tech,
“given strong fundamentals and inves-
tor preference for stable growth
trends,” he wrote in a recent client note.
Relatively low payout ratios are an-
other factor that makes the group and
its dividends attractive, says Barclay.
While there are several ways to mea-
sure such ratios, he looks at the divi-
dend as a percentage of a company’s
free cash flow—essentially its operating
cash flow, minus capital expenditures.
For the tech companies in the fund
that he co-manages, it’s a relatively
low 44%, says Barclay, citing that as
one of three reasons for technology
stocks offering attractive dividends:
“Durable cash flows that we believe
over time can grow, strong balance
sheets, [and] payout ratios that aren’t
stretched.”
He favors a long-term investing ap-
proach. “When you buy stocks of com-
panies that have the good underlying
fundamentals to support dividend
growth, you’re going to see nice rates of
growth in the dividend,” he observes.
One company he favors is analog
chip maker Texas Instruments, which
recently declared a quarterly dividend
of $1.02 a share, up 13% from 90 cents.
Its chips are used in various industries,
including automobiles, shielding it
from overreliance on any one customer.
“You continue to see the amount of
silicon content go up everywhere—not
just in smartphones and PCs, but also
in autos and industrial and consumer
products,” says Barclay.
He also likes semiconductor-
equipment companies. These include
Lam Research (LRCX) and KLA
(KLAC), which yield 1.5% and 1.8%,
respectively—both well above the aver-
age of 1% for S&P 500 tech companies.
In late August, Lam Research
declared a quarterly dividend of $1.30
a share, up 13% from $1.15. The stock
has returned about 19% this year.
KLA declared a dividend increase in
August, as well. It is now paying 90
cents a share per quarter, up from 85
cents, an increase of nearly 6%.
Barclay’s parting advice to income
investors: “You want to focus on the
income that grows, not the yield.”
And plenty of dividend income
is growing in the technology sector,
even if many of the yields aren’t that
enticing.B
By Lawrence C.
Strauss
Taking On Tech
Many tech stocks sport puny yields. But many of their dividends are growing,
and there are some higher-yielding names, too.
IBM/IBM $122.01 5.3% $109 -5.6%
Cisco Systems / CSCO 38.57 3.7 163 -16.9
Broadcom / AVGO 366.10 3.5 148 20.2
Texas Instruments / TXN 144.08 2.8 132 14.9
Automatic Data Processing / ADP 140.96 2.5 61 -15.6
Qualcomm / QCOM 120.52 2.1 136 39.4
Lam Research /LRCX 342.23 1.5 50 18.5
Applied Materials / AMAT 60.60 1.4 55 0.3
Microsoft / MSFT 210.38 1.1 1,600 34.5
Apple / AAPL 116.50 0.7 2,020 59.8
Company / Ticker Price Yield Value (bil) Return
Recent Dividend Market YTD
Returns and market values as of Oct. 5; all other data as of Oct. 6. Source: FactSet
S&P 500 tech companiesmore than doubled their
second-quarter dividendsfrom five years earlier—
far outstripping the broader index’s 34% increase.