“Tech stocks are only good for young investors with no income needs.” This classic thinking about the tech industry could not be further from the truth today. When a company is growing its business at a very fast pace, it usually not the time to distribute a part of its cash. For that reason, many techs show high PE, strong revenue growth and no dividend. Still today, many dividend growth investors decide to pass on this sector and ignore a world of possibility. Did you know there is a long list of dividend paying tech stocks? Take a peek!
|Ticker||Name||Rev 5 yr||EPS 5yr||Div 5yr|
|AMADY||Amadeus IT Group||7.99%||12.49%||36.63%|
|CMG.TO||Computer Modelling Group||4.23%||0.34%||11.95%|
|FORTY||Formula Systems (1985)||12.77%||-14.84%||10.32%|
|HPS.A.TO||Hammond Power Solutions||3.23%||-12.04%||5.92%|
|MCFUF||Micro Focus Intl||26.00%||-4.17%||20.23%|
|TYPE||Monotype Imaging Holdings||9.49%||-14.96%||41.39%|
|WSTG||Wayside Technology Group||8.63%||-1.09%||1.22%|
A new tech era
There is a very interesting shift in pretty much all industries: Tech stocks invite themselves in to all sectors and get the party started. We are used to technological improvements in a specific field from time to time. It’s a little bit like when robots started to work in the car industry. It was a revolution for workers, but the companies were the same. There were existing players simply improving their business model with new technology. Over the past few years, we have seen a different kind of shift: new techno players entering a classic field with their own technology. Now GM (GM) knows how their workers felt when they introduced their first “robot colleague”. This is happening simultaneously in many sectors:
Consumer Retail:This is what we all call the “Amazon Effect”. While some consumers still prefer to drive to their favorite retail stores, many purchases are being made online. We’re not just talking about books anymore, we are talking about pretty much everything you would buy on a regular basis; even groceries! Amazon (AMZN) will continue to hurt companies like Target (TGT), Walmart (WMT), Kroger (KR) and Costco (COST).
Television/Cable industry: Once again, the way we consume a product has been transformed by a new player. Netflix (NFLX) is offering something we all desire: watching what we want, when we want and without ads. This is an offer no classic cable company can offer now. Even though Amazon is doing it too, Netflix is gaining market shares every day.
Financials: We once thought banks and investing firms were untouchable by new players. We first saw the arrival of “virtual banks” offering high yield savings accounts and GIC’s. Then, mortgage brokers started a new wave, allowing you to shop for your mortgage online.. The revolution is now getting to a whole new point with companies like Robinhood. While big brokers charge you $4.95/trade, Robinhood does it for free. If you don’t want to manage your own portfolio, that’s fine too. Wealthsimple and other companies can offer you robo-advisors that will do it for you.
Car industry: We are still more at a development phase here, but one day, the biggest car manufacturers might be Alphabet (GOOG), Apple (AAPL) or Tesla (TSLA). Imagine the day that your car will drive by itself, automatically connect to your watch, phone and will manage your heating and lighting at home? I don’t think GM and Ford (F) have what it will take to fight back.
Transportation: let’s stay in the car industry but add general transportation. Uber is shaking up the taxi industry across the world. No more hailing a cab, you just order it with your fingertips. You don’t even need cash to pay, your phone does it for you!
Accommodations: If one day we could have thought of a competitor to Hilton that doesn’t own a piece of land… Airbnb has filled a gap where customers don’t want a fancy hotel with room service. They want a local experience at the same, or even lower price.
I could go on and on, but I think you get my point: there are new players in all industry corners ready to grab market shares with innovative technologies. This trend will affect your portfolio, especially if you are dividend growth investors. Many classic dividend holdings belong to… well… classic industry models! Those models are threatened with disruption by those new players.
Tech stocks pay dividend too!
As you can see, many of them don’t pay dividends. In fact, it will take several years, perhaps even a decade, before you can hope for Amazon or Netflix to share their wealth with shareholders. The problem is that most of these companies are still fighting the market share war and investing their cash into growing their company instead of paying dividend holders. However, if you want a sneak peek of what will happen in a decade from now, let’s take a look at “older” techno stocks and how they turned out:
As you can see, besides Intel (INTC) that has been less generous, other techno stocks are showing incredible dividend growth over the past 5 years. While classic companies continue to increase their payouts,they are no match for the “old techs”:
Do not consider getting rid of all your classic dividend stocks, this is not what I’m saying. In fact, many companies remain very strong and will continue to pay increasing dividends. What I’m saying is:
“If you are looking for dividend growth; techno stocks are well positioned to meet your requirements”
Don’t go crazy and buy AMZN, NFLX and the others. Instead, let’s focus on companies that have been proven to be dividend growers already. There are some very interesting companies in this sector among those who pay a growing distribution where valuation isn’t all crazy yet. Mind you, I bought some AZMN shares in 2017…
There is also an element of volatility that comes with this sector. While these companies shake up many industries, they can be overtaken at their own game by newcomers. Innovations can bring many revolutions within a short period of time and being the first in a new market isn’t a guarantee of success. BlackBerry (BBRY) was poised to own the smartphone industry until Apple entered the dance and nearly annihilated the smartphone manufacturer within 4 years. The following graph gives some food for thought:
The Tech stocks dividend list is updated monthly
I think there are several great opportunities in this sector. The key here is to find companies with a strong competitive advantage. You don’t want to pick junk that has been brought up to the top by the high tide. You want to pick only the finest shrimps for your portfolio. This is what we will offer you in the following list.
While this page cannot be taken as a source for stock recommendations, this is the perfect starting point to build or improve your portfolio. I wanted to create an oasis of stock ideas.
Here are the metrics I’ve used to build each list:
- Dividend yield between 1.5% and 10% (I want stocks that pay dividend)
- 5-year revenue growth positive (I want growing businesses in my portfolio)
- 5-year normalized diluted EPS growth positive (growing earnings leads to more dividend growth)
- 5-year dividend growth positive (I want management committed to make me richer)
- 3-year dividend growth positive (management must not sleep on the job)
- Payout ratio under 100% (I want those dividends to keep coming)