For years, technology was the not first sector investors thought of when they thought of dividends. The largest sector weight in the S&P 500 is changing that and that change has been a boon for an array of exchange traded funds. In fact, in dollar terms, technology is now the largest dividend-paying sector in the U.S.
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Apple, Microsoft, IBM, Qualcomm and Cisco combine for among the dividend payers found in the Technology Select Sector SPDR (NYSEArca: XLK) and the Vanguard Information Technology Index ETF (NYSEArca: VGT). There is room for more tech dividend growth. There are 257 tech names in the S&P 500, but less than 50% pay dividends, by far the lowest percentage of the 10 sectors tracked by the index, according to CNBC data.
Exchange traded fund investors who are interested in tapping into the big growth names from the technology space have a number of broad and focused sector-specific ETF options to choose from. Among the sector SPDR ETFs, XLK is the third-best performer this year.
“Tech companies like Apple (AAPL), Microsoft (MSFT) and Cisco (CSCO), are drowning in cash (30% of Cisco’s market cap value is in cash). Their business models are not capital intensive. Their balance sheets are also not saturated with debt. Pension obligations and the burdens of the “old economy” are non-existent. Only so much can be reinvested into Research and Development. What to do with all of this cash,” according to a Point View Wealth Management note posted by Amey Stone of Barron’s.
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Traditionally, tech companies have not considered paying back their investors. Instead, many firms opted to reinvest cash back into the company or buy back stocks. However, times are changing, and the technology sector of the S&P 500 is now among the top dividend issuers. Technology companies began to compensate shareholders during the financial crisis, and the habit stuck.
ETF investors can also utilize the First Trust NASDAQ Technology Dividend Index Fund (NasdaqGS: TDIV) to focus on some of the top dividend payers in the tech space. TDIV has a 2.65% 12-month yield.
TDIV includes some criteria for inclusion to make sure tech companies meet the dividend cut. For instance, the ETF only includes companies with at least a 0.5% yield and those that have not cut dividends per share paid within the past year.
“When looking for income in this low yield world, you should not focus entirely on the stated yield, but also the commitment management has made to the dividend, the balance sheet to support the dividend, and the payout ratio to provide more room to grow the dividend. The high flying tech stocks of yesteryear are the income darlings of today,” adds Point View Wealth Management in the note posted by Barron’s.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
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