As Big Tech matures, dividends are rising

Investors traditionally turn to technology stocks for growth, but as the sector matures dividends are rising too.

So, while new technologies are creating another generation of start-ups, the older names are offering a rising stream of dividend income. This is why Harvest Portfolios Group recently raised the monthly distribution of its Harvest Tech Achievers Growth & Income ETF (TSX:HTA).

As of April 30, 2021, the ETF’s monthly distribution rose 20% to 7 cents a month, the first distribution increase since the ETF was launched in 2015. A covered call strategy lifts the monthly current distribution yield to 5.5%. 

“Tech is still very much a growth sector, but many companies have matured and started paying dividends,” says Harvest senior portfolio manager James Learmonth. He says that between 2000 and 2020 the S&P Technology Index saw an average annual dividend per share increase of 17%.

“That is pretty impressive for a sector focused on growth,” he says.

The Harvest Tech Achievers Growth & Income ETF is an equally weighted, actively managed portfolio of 20 large-cap companies that are diversified across the technology sub sectors. As of April 30, 2021, more than half of the companies are in the semi-conductor (33%) and software (29%) industries. The rest is spread out among IT Services (10%), media (10%), equipment and hardware (10%) and communications equipment (5%.) It is designed to provide a consistent income stream as well as an opportunity for growth which is enhanced by the covered call strategy.

HTA Sub-Sector Allocation (as at April 30, 2021)

Mr. Learmonth said the ETF has an average portfolio dividend yield of 1% and 13 of the companies now pay a dividend. With a pandemic-induced boost behind them, many of the dividends have increased, with an average annual increase between fiscal 2019 and 2020 of 9.9%. A few of the larger dividend increases are: Oracle, 18.5%; Microsoft, 10.9%; Texas Instruments, 15.9%; Broadcom, 22.6% and Apple, 6.0%.

Mr. Learmonth says the sector has the lowest debt to total assets ratio across all the S&P sectors at 27%. High quality balance sheets suggest these companies may be less likely to need to cut dividend payments to cover other financial obligations during cyclical downturns.

The average dividend payout ratio for the sector is 50%, third lowest for the S&P 500. A payout ratio of 50% means 50% of profits are paid as dividends with the rest retained for investment in the businesses.

“These are businesses that have pretty solid growth rates in front of them. Their balance sheets are strong, cash flows are growing and the underlying assets are solid. So, the ratio can rise.”

Mr. Learmonth says the pandemic lifted the sector because the companies provide services which allow people to work from home and also find new forms of in-home entertainment. 

“The work from home shift made a lot of these companies’ beneficiaries of the lockdown, especially the mega-cap names like Apple, Microsoft, Amazon, Google and Facebook.”

Tech valuations peaked in the fall and as everyone looks forward to an improving economic outlook, investors have shifted to more cyclical areas. But that is not a reason to avoid the sector, he says.

“This is not a reflection of a deterioration in fundamentals, but a cyclical switch to financials, consumer discretionary stocks and resources that tend to benefit in the first part of the cycle.”

Mr. Learmonth  says Harvest is bullish on the tech sector which is being driven by multiple drivers. These include cloud-based internet and data storage infrastructure, emerging technologies like autonomous vehicles and artificial intelligence and things like digital advertising growth and digital payments.