New King of Dividends: Tech Sector

Written by John Lounsbury

The Tech sector is the new king of the mountain when it comes to dividend payouts.  The latest data shows that the high flying growth sector of the past several decades has matured and now edges long-time dividend paying sectors such as Healthcare, Financials and Consumer Staples as the sector with the largest share of dividends paid.

The latest data from Standard & Poor’s shows that the Tech sector has paid 14.22% of all dividends by S&P 500 stocks, just edging out Consumer Staples for top spot on the list of sectors’ dividends paid.

Longstanding dividend paying sectors such as Industrials, Utilities, Energy and Telecomm are far down the list.  Of course there are many more Tech companies than Utilities, so on a per-company basis the ranking is different.  Tech stocks average only 2.0% yield compared to 2.5% average for all dividend paying stocks.

The following table from S&P Research (via Securities Technology Monitor) shows how dividend payouts are distributed among sectors.

The new king is aided in establishing his position by his sheer size. Technology is by far the largest sector in the S&P 500, as shown here:

When dividend totals are divided by capitalization totals, a result is obtained that is proportional to dividend yield:

The 2011 dividend yields by sector are shown in the following table:

In just two quarters, the dividend yield of the tech sector has increased by a third, with a lot more room for growth. The growth can come from two sources: increasing the current low payout ratio and the high-projected earnings growth rate. The sectors are compared in this regard in the following table:

The tech sector has the second-highest estimated growth rate and the lowest dividend payout ratio, which gives it the largest dividend growth potential of the 10 sectors. Consumer discretionary and financials would be the sectors with the next best dividend growth potential.

Consider a hypothetical scenario, by assuming the following criteria:

• All earnings growth rates are realized.
• Current price-to-earnings (P/E) ratios are unchanged after five years.
• All sectors with payouts below the average will increase to the current average (0.32) in five years.

Under these assumptions, the appreciation and dividend yields calculated for each of the top three dividend growth potential sectors are shown in the following table:

The two sectors with the lowest dividend yield in 2011 (consumer discretionary and info tech) are the two sectors with the highest long-term growth estimates and seem likely to move up the dividend yield table significantly over the coming years. These two sectors, and especially tech, should be the top-performing growth and income sectors. The growth of dividend yield projected depends on these two sectors moving more into the middle of the dividend payout ratio range. If the tech companies lag in this regard, which could happen if they choose to use a larger amount of their earnings for growth through acquisitions, then the projected 3.8 percent yield will not be reached.

However, assuming the acquisitions are prudent (not always the case), the capital growth rate could be higher.

Of course, the earnings growth rate projected by Standard & Poor’s may be way too optimistic and all the returns projected for the next five years could be pie in the sky. However, under even more conservative scenarios, tech should still do better than many other sectors.

A New Dividend ETF

A new exchange-traded fund (ETF), the First Trust NASDAQ Technology Dividend Index Fund (Nasdaq: TDIV) focuses on the dividend-paying segment of the tech sector. In spite of the name, however, the “T” in the ticker also covers telecom, which comprises 20 percent of the fund’s holdings. Since its launch at 20 on August 14, TDIV has traded in a narrow range, with an intraday high of 20.41 on August 17 and an intraday low of 19.65 on August 31. TDIV closed Friday (August 31) at 19.89.

The fund hasn’t posted a dividend payout record yet. Based on 2011 prices, the TDIV yield for that year would have been 3.54 percent. Tech companies will pay $26 billion in dividends in 2012, up 14 percent from 2011, First Trust Advisors said in a statement on the day of the ETF’s launch, citing Moody’s research. In the past four years, tech dividends grew 11 percent a year on average. First Trust NASDAQ Technology Dividend Index Fund is a great play, for investors who want to achieve both growth and income.

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