Meta and Alphabet’s first dividends to shareholders this year have raised the question of whether tech stocks could start to be considered as a source of income.
Equity investors should certainly consider tech stocks as a source of dividends, says Martin Connaghan, a manager of Murray International Trust. But he adds that Meta and Alphabet should not be seen as catalysts for this trend.
“These companies have billions of dollars in cash on their balance sheets and generate substantial free cash flow, providing opportunities for attractive dividend growth,” says Connaghan. “However, their current yields are still quite small.
“There are other technology companies that have been paying dividends for many years, and offer more attractive yields. Examples include Broadcom, TSMC, Cisco, SAP, Hon Hai Precision, Sage Group, Tokyo Electron, and Samsung Electronics, to name a few.
“I would argue that these stocks are more suitable for equity income investors, while Meta, Alphabet, Microsoft, and similar companies should be considered for growth allocations.”
Semiconductors and software are also sub-sectors with a history of paying healthy dividends, says Mark Peden, co-manager of the Aegon Global Equity Income Fund. He similarly describes technology as a sector that should appeal to a variety of investors.
“Mistakenly, many think that technology stocks are solely the domain of growth funds,” says Peden. “Income investors that avoid this particularly important part of the market will miss some great investment opportunities.”
Storm Uru, manager of the Liontrust Global Technology Fund, likewise says that with the adoption of artificial intelligence now “table stakes”, being on the right side of this shift is essential.
“The race to implement AI is now on to remain competitive over the next five years as new start-ups enter the market. Equity income portfolios must either align with this technological platform shift or risk being disrupted.
“For income investors, there are numerous ways to capitalise on this opportunity to drive both income growth and capital appreciation. This can be achieved through investments in new companies paying dividends like Meta, and in companies that have been well positioned over the past decade such as Broadcom, which has consistently paid out growing dividends.”
Could tech dividends become more common?
As some tech businesses mature further and generate more cash, some will choose to return this as dividends, says Tomasz Godziek, head of thematic equities at J Safra Sarasin Sustainable Asset Management.
Gerrit Smit, manager of the Stonehage Fleming Global Best Ideas Equity fund, also says that tech stock dividends could become more common. “Many tech stocks have strong cash generation and strong balance sheets that can finance good dividend payments.
“This is especially the case for cloud businesses, and we can later expect a business like Amazon to also pay dividends. We would be more hesitant in the case of cyclical and capital-intensive businesses that do not generate strong returns or cash flow.”
Meanwhile Ben Peters, portfolio manager of the Evenlode Global Income fund, notes the alternative of share buybacks.
