Tech’s new dividend era: Alphabet and Meta begin payouts

Alphabet and Meta declared a dividend for the first time this year. It wasn’t a lot – just $0.2 per share in the case of Alphabet - but they now take their place alongside Microsoft, Tesla and Apple in making regular payouts to shareholders*. However, it doesn’t necessarily change the landscape for income investors.

The technology sector has undoubtedly improved its credentials as a dividend option. Along with the technology giants, companies such as Broadcom, Salesforce, Cisco and Qualcomm also pay dividends. The Morningstar US Dividend Growth index aims to identify securities with a history of dividend growth and the capacity to sustain that growth in future. The technology sector has been as low as 2.3% of the index and is now around 17.5%**.

However, Morningstar also points out that its US Technology index has the lowest yield of all the sector indices. This is also true of many of the mega-caps. Microsoft, for example, yields just 0.67%, while Apple yields just 0.43%***. Also, the share prices for technology companies have grown so fast that the yield as a percentage of the share price has dropped – in other words, investors have to pay more to get the same level of dividends. Equally, many technology companies have done little to grow their dividends.

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Global equity income funds

Against this backdrop, technology still makes up a relatively small part of most global equity income funds. Nevertheless, some will include technology for its dividend growth prospects, rather than the absolute level of dividend. For example, the IFSL Evenlode Global Income fund has a 4% holding in Microsoft, as part of a 12% allocation to technology****.

Manager Ben Peters explains his rationale: “The companies we look for are in a sweet spot. They have the quality of product or service that keeps customers coming back for more, consistently generating revenues, and they use some of that to invest in the assets of the business – think of Louis Vuitton’s stock of handbags, Microsoft’s cloud operating software or OpenAI investment, or Nestlé’s research into the next generation of pet foods.

“Whether tangible or intangible, these investments are vital to the long-term attractiveness of a business’s offering to customers, and thus the long run viability of the franchise. Steadily investing, generating a return on that investment, and repeating year in year out, provides the compounding effect we are seeking, with the dividend being a tangible output of this process.”

The Guinness Global Equity Income fund also has a relatively high weighting in technology at 15%^. It holds a number of the large semiconductor names, including Taiwan Semiconductor, and Texas Instruments^, which have a history of paying dividends, but manager Matthew Page has been encouraged by the number of higher growth companies starting to pay dividends.

He says: “Several companies including Booking.com and Alphabet, have joined Meta and Salesforce in becoming the latest technology names to introduce a dividend. It may also be the case that, in the current high interest rate environment, the opportunity cost of not paying a dividend has increased. In other words, with a high cost of capital, investors may marginally prefer to receive real cash payments at present rather than see cash flows allocated elsewhere. Even though the reason for the growing number of dividend-paying companies is up for debate, it is clear that a strong trend has emerged.”

However, Page also points out that Information Technology has the lowest percentage of dividend payers (54%)^^. He attributes this to the abundant growth opportunities in the sector. “Management teams often prioritise reinvesting cashflows into the business alongside sizeable share buyback programmes. Furthermore, the sector has the lowest average yield (1.5%) which can partly be explained by strong share price appreciation (outpacing dividend growth), leading to relative yield compression.”

Alternative options

Non-US technology companies have had a better track record than their US counterparts on dividends. In Asia, for example, the technology giants have a long history of dividend payments. Chinese social media giant Tencent has been paying a dividend for over a decade, progressively increasing it every year. This year, it more than doubled its payout ratio (from 11% to 25%)^^^. TSMC and Samsung also have lengthy dividend histories.

The Schroder Asian Income fund has around 30% in the IT sector****, much higher than any of the global equity income funds. Manager Richard Sennitt says: “IT stocks have performed strongly and our positions in some of the Taiwanese names have done particularly well. It’s a combination of components – stocks are coming from a cyclical low but also the structural driver of AI in the industry. IT companies in Taiwan and Korea are beneficiaries of that trend too.”

In reality, if investors want to invest in technology, a global equity income fund probably isn’t the best way to do it. They will get more technology exposure from a straightforward global equity fund, such as the CT Global Extended Alpha (37% in IT)****, or a US growth fund, such as Comgest Growth America (32% in IT)****. Equally, if they need a reliable income, technology probably isn’t the best place to find it. The exception is Asian income funds, which can be a good way for income seekers who want to balance dividends and technology.

One final point is that technology may become a more important source of dividends in future. In Asia, technology companies started paying higher dividends when company management teams realised they needed a wider audience for their shares. If global technology companies suddenly find that they can’t attract enough interest for their shares, they may decide to return some of their vast cash piles to shareholders.

*Source: Motley Fool, 30 April 2024
**Source: Morningstar, 20 May 2024
***Source: Koyfin, July 2024
****Source: fund factsheet, 31 May 2024
^Source: fund factsheet, 30 June 2024
^^Source: investment commentary, June 2024
^^^Source: AAstocks, July 2024

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice.