The New Era of Tech Investing: Balancing Growth with Dividend Payout

Growth and the technology sector have long been synonymous with each other. Thanks to innovation and transformative invention, the sector has a very fast-moving connotation. And because of that, investors have used tech as a capital gains component. After all, smaller start-ups tend not to be very profitable. The exceptions have historically used their cash flows to keep growing their businesses. Paying shareholders dividends from excess cash was often a sign that a tech firm’s best days were behind it.

However, investors may want to rethink that stance.

It turns out that growth and dividends can go hand-in-hand in the technology sector. Over the years this perception has continued to change. More recently, several big-time tech firms – full of growth – have enacted payouts. For investors, this is wonderful news and underscores how tech can provide a great total return for a portfolio.

This year is shaping up to be interesting for tech investors, particularly for those looking for income. And that’s because a trio of big-time names have joined the dividend crowd.

Mark Zuckerberg kicked off the conversion back in February when he announced Meta would start paying a dividend, shocking analysts and the market. The initial dividend rate of $2 per share equated to a 0.50% yield at the time of announcement. Not to be outdone, tech stalwarts Google and Salesforce followed suit, announcing initial dividend payments soon after. Then, Booking.com announced its initial dividend.

These announcements fly in the face of the concept of tradition in the technology sector.

Historically, tech has been a place for growth. Innovation isn’t always profitable, and smaller firms – or those experiencing fast revenue generation – will often plow whatever cash flow they make back into the business. Expansion is the name of the tech game.

Historically, when a technology firm hit the point where it was willing and able to hand investors back excess cash via a dividend, it was often seen as less desirable. Perhaps, its best days were behind it and growth rates faced a standstill. This was true for the longest time: Tech stocks that paid dividends were often relying on legacy products and under constant fear of disruption.

The state of affairs in the technology sector is much different these days, as it navigates thick margins and surging demand.

Margins drive a firm’s profitability. The bigger a company’s margins are, the more its revenues can get turned into profit. For some industries like manufacturing or materials, you can only squeeze out so much profit from your products since raw materials and energy costs can crimp margins. But when a company’s product lines translate to lines of code on a screen and its only real costs are people and computers, the margins can be very wide indeed.

This is exactly what’s going on in the tech sector right now.

Margins at many tech firms have become very hefty indeed. Even more so as the focus on Software-as-a-Service (SaaS) and recurring/subscription revenues has become the norm. This has allowed many tech firms to produce ample cash flows and maintain very large balance sheets. Meta had more than $58 billion in cash and equivalents when it made its dividend announcement.

With such huge cash balances, the sector as a whole now feels comfortable handing out dividends. According to Capital Group, 37 of the 65 technology companies in the S&P 500 Index pay a dividend. Moreover, this chart from the asset manager highlights how tech is now the second-largest dividend-paying sector in terms of total cash outlay in the index, only behind the financial sector. ¹

Source: Capital Group

In addition to those wide margins and cash balances, there’s still plenty of growth to be had for the technology sector.

Artificial intelligence (A.I.) products and solutions are quickly becoming a major growth element for many tech firms – including those that pay a dividend. As businesses look to integrate various A.I. solutions into their products and back-end operations, tech is expected to get a windfall. Leading tech dividend stock Microsoft recently reported that demand for its A.I. capabilities is currently outstripping its available supplies. Moreover, A.I. produced a 7% revenue jump for its Azure Cloud division during the last quarter. Mircrosoft isn’t alone when it comes to surging A.I.-driven revenues.

And this doesn’t take into consideration any other tech trend. From the Internet of Things (IoT) and self-driving cars to robotics and consumer gadgets, tech has a lot of levers to pull when it comes to growth.

Another reason why tech may be going all in on dividends could be its founder-led nature. Salesforce, Meta, and Google each still have their founder running the show. Dividends make it easy for these founders to extract profits from the business without selling shares, thereby maintaining control over the firm.

The truth is that tech firms paying a dividend today don’t accurately reflect the idea that they are washed up. In fact, it’s quite the contrary – these firms are producing more cash than ever. And even after expanding into new growth areas such as A.I., they simply have too much cash. This is wonderful news for income investors.

The best part is that many other tech stalwarts now feel the pressure to start paying dividends. Analysts have already suggested that Amazon and PayPal could start payouts sooner rather than later.

Overall, instead of being wary of technology dividends, investors should embrace them. The best part is that there are plenty of ways to do just that. Running our screener unearths plenty of large- and mid-cap tech stocks with ample dividend prowess. Keep in mind that initial yields may not be that big. However, dividend growth among tech names has been more than the market average for a long time.

These dividend-paying tech stocks are sorted by their YTD total return, which ranges from -12.6% to 70%. They have market capitalization between $56B and $3T and yields between 0.02% and 3.14%.

These ETFs were selected based on their exposure to tech stocks at a low cost. They are sorted by their YTD total return, which ranges from -0.5% to 21.5%. They have expense ratios between 0.08% to 0.57% and assets under management between $3.9B to $64B. They are currently yielding between 0.01% and 2.1%.

In the end, technology is one of the few sectors that offers a chance for both income and growth. The idea that they are past their prime when they initiate a dividend is poppycock. Thanks to growth and high margins, cash flows and balances are really that large. Add in a high founder-based ownership structure and it’s easy to see why tech has quickly become the dividend sector du jour.

With Meta’s new dividend, investors are starting to question if big tech’s growth days are behind them. The truth is – it’s the opposite. Thanks to surging A.I. demand and other key trends, tech’s best days are ahead of them. And thanks to the sector’s high margins, investors are able to share the wealth via big dividend payouts.

¹ Capital Group (May 2024). Meta shifts the narrative on dividends in the world of Big Tech