In the past 10 years, technology stocks have taken over the S&P 500 Index. Their weighting within the index went from 11% in 2013 to 27% by the end of 2023. Historically, tech stocks have not paid a dividend because they instead chose to funnel excess earnings into new products or business ideas that they thought would generate future growth. So, are these new dividend payments signaling the end of growth in tech stocks? The short answer is probably not!
Below is a table of the top 6 holdings in the S&P 500 (which are all a part of the tech+ category), when they started paying a dividend, and the amount.
Three of these companies just started paying a dividend this year, and Amazon.com is very likely to follow suit before the end of the year.
Dividends are the distribution of corporate profits to shareholders. These companies have billions of dollars in cash and continue to generate free cash flow each quarter, and they just don’t need to reinvest it all into their business. While the yields offered by most tech names are relatively small, their potential to grow dividend payouts—along with earnings over time—is tremendous. In addition, no one looks to growth stocks to pay a meaningful dividend; value stocks—that is, companies that have matured out of the growth phase and are no longer heavily investing in research and development—have historically been the ones to pay out dividends, and typically with higher yields. Any dividends from growth stocks are a bonus!
Dividends provide a level of stability some investors are looking for. Generally, a company will not cut a dividend unless it is under extreme duress, such as during the Covid-19 pandemic when we saw a rush of dividend cuts. So, by offering a small dividend, it could broaden ownership of the stock as dividends are a signal to investors that the company is stable.
Paying a dividend does not mean the company has run out of room to grow. In this case, it is more likely to keep activist investors and money managers from complaining about a lack of a dividend. As Apple and Microsoft have proven, you can pay a meager dividend and still produce considerable growth over the course of decades. It should be noted that dividends are modest in absolute terms and look even more humble when expressed as a yield percentage. This is due in large part to the rally in the share price of tech stocks; small dividend payments on a stock with a high share price will calculate to be only a small percentage.
There are many mutual funds and ETFs that focus on dividend growth, not dividend yield. These funds look for the consistent payment of dividends and the year-over-year growth in the payout. According to Morningstar.com, “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.” A few years ago, most dividend growth funds were overloaded with stocks in the financial sector and other slower-growing companies.
New dividend payouts from a tech company indicate that the company is maturing and is cashing in on years of growth, not as a statement of no future growth for the company. As investors, we should be happy to see dividend payouts from these companies. If you’d like to discuss how dividends impact your current portfolio allocation as well as some of our best ideas on how to maximize dividends in your portfolio, feel free to contact me at ted.schumann@dbsia.net or 800-327-2377.