On Aug. 15, The Economist published an article titled "Big Tech is the new dividend royalty."
The Schumpeter column (named after the famed economist) argued that big traditional dividend payers such as oil companies can no longer afford to be the dividend leaders. As a result, dividend investors are turning to an unlikely source: big tech.
The column pointed out that in the U.S., dividends from large-cap stocks grew from $342 billion in 2013 to $535 billion in 2019.
It added, "That rise reflects the increasing generosity of a group of American companies which not long ago scoffed at dividends as condescendingly as they did suits and ties: technology firms. Strange as it sounds in the land of the buy-back, Big Tech is ascending to the ranks of the world's dividend royalty, thanks to its prodigious and fast-growing cashflows."
Much of the argument is based on the Microsoft Corp. (MSFT, Financial) and Apple Inc. (AAPL, Financial) dividends, which are relatively small but represent a lot of money because the companies are so huge.
As the column pointed out, "Strange as it sounds in the land of the buy-back, Big Tech is ascending to the ranks of the world's dividend royalty, thanks to its prodigious and fast-growing cashflows."
So should dividend or income investors begin their search for income stocks with the big tech companies?
Let's check the premise, starting with the FAANG stocks.
- Facebook Inc. (FB, Financial): Does not pay a dividend.
- Apple: With a dividend of 0.69%, it is well below the S&P 500 average of 1.88%.
- Amazon.com Inc. (AMZN, Financial): Does not pay a dividend.
- Netflix Inc. (NFLX, Financial): Does not pay a dividend.
- Alphabet Inc. (GOOGL, Financial): Does not pay a dividend.
Only one of the five FAANG stocks pays a dividend, and that one is less than half the S&P 500 average.
Of course, the big tech universe is made up of much more than the FAANG stocks. These are some of the larger American tech companies:
- Microsoft has a dividend yield of 0.96%, roughly half of the S&P 500 average.
- International Business Machines Corp. (IBM, Financial) pays a high dividend of 5.2% and the growth rate of the dividend means it has as 5-year yield-on-cost of 7.76%.
- Intel Corp. (INTC, Financial) throws off a 2.65% dividend yield.
- Adobe Inc. (ADBE, Financial) does not pay a dividend.
- Salesforce.com Inc. (CRM, Financial) does not pay a dividend.
- LinkedIn Corp. (LNKD) does not pay a dividend.
- Oracle Corp. (ORCL) pays a dividend of 1.78%.
Those are 12 of the largest American tech companies. In that group:
- Seven of 12 do not pay a dividend.
- Five of 12 do pay a dividend.
- Of the five that pay dividends, only two have yields greater than the S&P 500 average.
As an alternative to searching among big tech stocks, I used the GuruFocus All-In-One Screener to search for what I thought might be good dividend stocks, regardless of industry, based on these criteria:
- Country: U.S.
- Market capitalization: Large, at least $20 billion.
- Dividend yield of at least 5%.
- Dividend growth rate of at least 5%.
Just nine stocks made it through the screener:
As we can see, just one big tech stock made it through this screen, IBM, which I recently analyzed. At the time, July 10, the company had just become a dividend aristocrat, one of a handful of companies that had increased its dividend payment every year for at least 25 years.
Four of those companies (Marathon (MPC), MPLX (MPLX), Phillips 66 (PSX) and Valero (VLO)) are energy companies, and their dividends are relatively high because their share prices have been deeply depressed.
The same holds for tobacco company Altria (MO), Simon Property Group (SPG), an owner of shopping malls, and the scandal-plagued bank Wells Fargo (WFC).
It's back to drawing board apparently, as this screen found little to interest dividend investors—and uncovered no more tech stocks.
Conclusion
I think The Economist is correct about big tech becoming dividend royalty, but only in the macro sense. Microsoft, Apple and IBM are so big that even though the first two have low dividend yields, they make big tech's contribution substantial. The magazine pointed out that Microsoft paid out $15 billion in dividends in its latest fiscal year, but that was only a third of its $44 billion in net profit.
For individual investors, chasing big tech stocks for dividends is not likely to be productive. There are not many of them, and because they are so popular, investors face the threat of having too pay too much for them.
IBM does hold a unique place, but as I found in researching it, income investors would have to be prepared to live with a share price that has trended downward for several years, growing debt and shrinking cash flow.
Disclosure: I do not own shares in any companies named in this article.
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