Is Tech the New Income?

09/07/2012 11:30 am EST

Focus: ETFs

We've heard at times that “growth is the new income” and “income is the new growth,” but now it seems tech is the new income, and there's a pretty compelling case, writes John Lounsbury of Investing Daily.

Dividend seekers can pay homage to their new king: technology.

The latest data from Standard & Poor’s shows that the technology sector has dished out 14.22% of all dividends paid by S&P 500 stocks, edging out consumer staples for the top spot on the list of sectors’ dividends paid. Longstanding dividend-paying sectors such as industrials, utilities, energy, and telecommunication are far down the list.

Of course, there are many more tech companies than utilities, which means the ranking is different on a per-company basis. Tech stocks average only a 2% yield compared to a 2.5% average for all dividend-paying stocks. The following table shows how dividend payouts are distributed among sectors (the data for this article’s graphics are from S&P Equity Research):

Click to Enlarge

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.

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 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 ten sectors. Consumer discretionary and financials would be the sectors with the next best dividend growth potential.

The two sectors with the lowest dividend yield in 2011 (consumer discretionary and 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% 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 Crowning Achievement
A new exchange traded fund, the First Trust NASDAQ Technology Dividend Index Fund (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% 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.

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%.

Tech companies will pay $26 billion in dividends in 2012, up 14% 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% a year on average.

Thus, First Trust NASDAQ Technology Dividend Index Fund is a great play for investors want to achieve both growth and income.

Read more from Investing Daily here...

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