Techs: The Next Frontier in Dividend Growth

And a new ETF lets you get in on the trend

By Aaron Levitt, InvestorPlace Contributor

There are some pretty diverse styles and stocks that fall under the heading of “investing,” but nothing is more synonymous than growth-style investing and technology stocks.

During the Internet boom and the go-go days of the 1990s, many tech companies were new businesses in sectors and categories not even invented yet. From devices and software to future state-of-the-art equipment, all scream economic expansion, high multiples and fast-moving share prices.

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Top 10 Dow Dividend Stocks
Top 10 Dow Dividend Stocks

However, times might be changing for the quick-paced sector.

Sure, the fast movers still are there — Red Hat (NYSE:RHT), anyone? But more than a decade after the tech bubble burst and firms like Dr. have vanished from the headlines, many of those tech survivors have matured into companies with strong balance sheets and financial flexibility.

That maturity provides another opportunity for investors — big dividends. In an effort to shed their strict growth past, many technology companies have introduced dividends. As a result, the sector has rapidly evolved into a dividend growth story — one that could provide income seekers just what they need.

$26 Billion in Payouts

Today’s tech sector is far removed from the dot-com era, when all-hype, no-revenue companies were the primary investment choice. It’s quickly emerging as an income hunter’s paradise. While the sector is not known for outsized payments — the Nasdaq 100-tracking PowerShares QQQ Trust (NASDAQ:QQQ) only yields 0.8% — plenty of tech companies have begun using their cash hoards to reward shareholders with something other than acquisitions.

Believe or not, during the past five years, the tech sector has seen dividend growth in the neighborhood of 16.5%. That has bested traditional income sectors — like utilities and health care — by a wide margin. Technology firms currently make up about 14.22% of all S&P 500 dividends. That’s higher than the consumer staples sector, another preferred stomping ground for dividend investors.

More importantly, those payouts are continuing to rise.

Cisco (NASDAQ:CSCO) became the latest tech stalwart to up its payout. On the back of record earnings, the networking giant boosted its quarterly per share dividend by 75%. As of the end of FY 2012, the firm had nearly $48.7 billion worth of cash, equivalents and investments on its balance sheet.

Cisco isn’t alone in returning its huge cash hoard back to investors. Both IBM (NYSE:IBM) and Microsoft (NASDAQ:MSFT) have significantly improved their payouts in recent years.

Perhaps the biggest signal for tech’s ascension into the world of dividends has been Apple’s (NASDAQ:AAPL) decision to finally pay back its shareholders with a quarterly distribution. While the firm currently only yields around 1.7%, Apple should be in a position to keep increasing that dividend for many years to come, given the fact it has more than $110 billion in cash on the books.

Overall, Moody’s estimates that we will see more of the same throughout the next few years. The ratings service predicts that the tech sector will pay out more than $26 billion in dividends in 2012. That is an increase of more than 14% from 2011 and higher than the 10.9% average annual growth of the prior four years.

A New ETF Has You Covered

With dividend payers in the technology sector reading like a who’s who of industry stalwarts — including chipmaker Intel (NASDAQ:INTC) and productivity software firm Oracle (NASDAQ:ORCL) — a broader approach may be better for investors. The popular Select Sector Technology SPDR (NYSE:XLK) now yields a very respectable 1.42%. However, a newly issued ETF from First Trust could be a better buy.

The First Trust NASDAQ Technology Dividend Index (NASDAQ:TDIV) will track 59 different tech firms that pay have paid a regular or common dividend within the past 12 months and yield of at least 0.5%. Other restrictions to the fund’s mandate weed out dividend-slashers and firms entering bankruptcy.

This focus produces an ETF with an implied yield of roughly 3.3%. That’s pretty good considering that treasuries and other traditional income products are paying next to nothing.

TDIV also will be the highest-yielding tech-focused ETF on the market. According to Morningstar, the highest-yielding tech ETF today is the Guggenheim China Technology ETF (NASDAQ:CQQQ) at 2.92%.

For investors, the fund offers a broad and simplified way to target the “tech dividend theme” and the explosive growth in their free cash flow and distribution payments.

While investing in brand-new ETFs always is risky thanks to fund closures/anemic trading volumes, I suspect First Trust will have a hit on its hands with this one. The fund’s relatively low expense ratio of 0.5%, coupled with its current high and potentially growing yield, will see to that.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

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