The technology sector is the dividend growth story of the last few years, leaving all others in the dust.
That includes the very sectors that have become synonymous with solid dividend increases – like utilities and telecom.
This was the case last April, when tech led the pack with year-over-year dividend growth of 46.1%, and it continues to be the case today.
According to FactSet Research, as of September 16, the sector’s growth is actually accelerating, and now clocks in with year-over-year payout growth of 62%. Compare that to the runner-up, financials. It lagged far behind, growing dividends just 19.1% on a year-over-year basis.
Like I pointed out, however, the trend is somewhat bittersweet. Because “as attractive and hip as technology stocks are, the businesses behind them are complicated, prone to hype and speculation, and – in turn – risky.”
Thankfully, as FactSet notes, the rising growth rate for the sector can be largely attributed to the “dividend policy shift from big constituents, including Apple (AAPL), Cisco (CSCO) and Microsoft (MSFT).”
Why is this good news? Well, the volatility that many tech companies usually pose isn’t shared by the industry majors. Their maturity, ubiquity and market entrenchment translate to investment stability.
This is especially true of Microsoft…
Tech’s Best Dividend Growth Play
Far past its market honeymoon phase, it’s now a lumbering giant on the charts, slowly climbing, just fast enough not to fall asleep…
Not even botched product launches like Windows 8 and the Windows Phone can appreciably sidetrack the stock for long.
It always resumes its steady climb in short order, regardless of the stumble.
In other words, although investors shouldn’t look to the stock for quick equity growth, they can rest assured knowing there’s little to no downside, either.
Microsoft, of course, has responded in the way most companies do when shareholders can no longer derive much value from price appreciation – by showering owners with dividends.
Case in point: Earlier this week, Microsoft declared another strong dividend increase in a long line of increases, raising its payout by 22%.
Further driving up shareholder value, the company announced a $40-billion stock repurchase program, which comes just in time for the expiration of its previous buyback initiative, also $40 billion.
Between the dividend growth and the stock repurchase, Microsoft has more than compensated for its tepid long-run stock performance.
Granted, year-to-date, shares have actually outperformed, returning 27%, compared to a return of 23% by the S&P 500 over the same period.
But on a broader basis, that outperformance is an anomaly. If we widen our view by only a few months, we can see returns begin leveling out, with the stock gaining just shy of 8% over a one-year period.
Compare that to the S&P 500 – up 21% over the last year – and it’s no wonder Microsoft remains committed to aggressive dividend growth. Without it, there’s not a whole lot for shareholders to sink their teeth into.
Now, despite the swift acceleration of its payout growth – which has climbed from a five-year average of 16.25% to a three-year average of 21% – its dividend payout ratio has actually fallen.
The upshot of this is, there’s no material reason that run-up in dividends has to cease any time soon.
And given that shareholder expectations are more or less set in stone and Microsoft behaves like a true-blue dividend growth stock, it’s unlikely that the company would risk disappointing. (Shareholders have always responded to such action by dumping shares in droves.)
Bottom line: Not all tech companies are created equal. In fact, I rarely approve of them for income investment purposes. Like I said, their complexity makes them difficult beasts for investors to understand and management to tame. And that means unpredictability.
But Microsoft stands among the exceptions.
Its long-haired, wild years far behind, Microsoft now wears loafers, and spends its days weeding the garden and taking late afternoon naps. It lives a boring, predictable and well-situated life.
In short, it’s the perfect dividend stock.
Safe investing,
Ryan Anders
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