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Apple, IBM Push Tech to No. 2 in Dividends

IBM’s (IBM) dividend boost Tuesday makes the technology sector the market’s No. 2 source of dividends, behind consumer staples companies.

That’s a stark transformation for tech, the market’s largest slice, representing 20% of the value of the Standard & Poor’s 500 index.

A dozen years ago, amid the dotcom stock boom, the sector was known for bloated valuations, patchy earnings and little by way of dividends. As recently as 2004, the tech sector contributed just 5% of S&P 500 cash payments to stockholders.

By 2009, tech’s contribution rose to 7%. Cisco (CSCO) introduced a dividend last year. Apple (AAPL) this year announced the largest payment initiation ever.

With the IBM increase, tech now contributes 13.7% of index dividends by dollar amount, according to Howard Silverblatt, senior index analyst at S&P.  That puts it second only to consumer staples (think peanut butter, beer and prescription pills), which contribute 14.8%.

At the same time, tech valuations have come down to market-average levels, and quarterly earnings for the group have become less volatile. Tech, in other words, is becoming a source of widow-and-orphan stocks, or shares that produce reliable income for conservative investors (see “Why Tech Stocks Look Better–Even for the Risk Adverse”).

And tech may yet become an even richer source of dividends. “If Google (GOOG) started to pay the same rate (yield) as Apple,  Information Technology would beat out Consumer Staples as the largest dividend payer,” wrote Mr. silverblatt Tuesday in an email.

Notable high-yielders in the tech sector include Applied Materials (AMAT) and Intel (INTC), each of which yields just over 3%, and Microsoft, which yields 2.5%. But although the sector has become a large dividend contributor in dollar terms, it isn’t generally a source for high yields. The sector as a whole yields 1.5%, versus 2.2% for the index, according to S&P.

That’s partly because tech companies pay a lower portion of their earnings as dividends than, say, utilities or consumer staples firms. Fast-growth companies often spend less of their profits on dividends than slow-growth ones. And the tech sector is projected to produce 17% earnings growth this year–the fastest of any sector, and nearly double the earnings growth expected for the broad S&P 500.


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