Tech stocks are absolutely killing it in 2017.
Everyone’s talking about the S&P 500 and the Dow Jones Industrial Average hitting all-time highs on a nearly daily basis at this point. That’s fair, but that’s not the biggest story out there. While the Dow Jones is up 7% this year and the S&P 500 has gained almost 9%, the tech-heavy Nasdaq Composite has roared ahead by 17% to nearly double the other broad-market indices.
The PowerShares QQQ Trust (NASDAQ:QQQ) — an ETF that tracks 100 of the largest non-financial companies in the Nasdaq — is poised to hit its seventh straight month of gains, the longest streak since 2009. The Vanguard Information Technology ETF (NYSEARCA:VGT) has jumped to 30%-plus gains in just a year’s time.
Thing is, this isn’t anything new. Tech stocks have increasingly become a market leader over the past decade, in part because of go-go growth thanks to the sector’s increasing and irreplaceable role in the world. But also, many of tech’s largest components are maturing and becoming significant dividend plays in their own right.
So tech stocks aren’t just continuing to climb — they’re an ever-attractive place to hunt down dividend growth.
Technology is no longer a place where you hope to catch lightning in a bottle. This is a buy-and-hold sector where you can reap outstanding rewards, through growth, income or both. Today, then, we’re going to look at a stable of seven tech stocks that you can jump into and feel confident holding for at least the next five years.
Must-Have Tech Stocks: Alibaba (BABA)
Amazon.com, Inc. (NASDAQ:AMZN) is one of the best tech stocks on the market, and it’s literally changing the face of retail in the U.S. However, the best play among e-commerce giants is Amazon’s counterpart in China, Alibaba Holding Group Ltd (NYSE:BABA).
Amazon and Alibaba aren’t quite the same in that the former does far more in the way of direct retail operations, while the latter is primarily a middleman. But because BABA doesn’t have to hold inventory and operate warehouses, it can generate better margins.
Alibaba is the world’s largest retail platform — surpassing Wal-Mart Stores Inc (NYSE:WMT) in 2016 — and it still has so much more growth to achieve, as it’s in the driver’s seat of the dragon economy’s digital revolution. Only about half of China’s population is currently online, and the number of Chinese getting online is still increasing by mid-single digits.
Meanwhile, Alibaba also is copying the Amazon model (and really, the model of a number of tech giants) in that it’s using its cash to expand into other businesses. Like Amazon with its Amazon Web Services cloud suite, Alibaba too has branched out into cloud offerings. It also boasts an Alipay payments service, streaming video sites, media properties and even device manufacturing.
China’s growth story is still far more robust than America’s, and Alibaba also has the potential to dig its claws into other emerging markets. Expect BABA to be a growth machine, and a cash-generation machine.
Must-Have Tech Stocks: PayPal (PYPL)
Speaking of e-commerce, you should also have a piece of American payments specialist PayPal Holdings Inc (NASDAQ:PYPL).
To this day, I never quite understood what eBay Inc (NASDAQ:EBAY) was thinking when it spun off PayPal back in 2015. Obviously, the idea was to “unlock value” for shareholders, but boy, did eBay lose a gem.
PayPal boasts nearly 190 million users worldwide as of 2016. Its brand name is tops among online shoppers, giving it an edge among consumers and retailers alike as more businesses look to take their operations online.
The company’s Q1 results included total payments volume that grew 23% year-over-year to almost $100 billion, and user accounts grew by double digits. Also driving transaction growth are peer-to-peer transfers and the Venmo app, which allows users to transfer small amounts — say, the price of a cup of coffee — instantly to friends who pick up the check. Venmo transactions more than doubled in Q1.
PayPal continues to make deals with firms like Visa Inc (NYSE:V), MasterCard Inc (NYSE:MA) and Citigroup Inc (NYSE:C) to integrate its systems into apps and other banking functions. This is critical to survival against competitors, and continued growth over the long-term. And considering that the bulk of transactions are still made in cash, PYPL has a much longer runway than most investors realize.
Thus, PYPL will be one of the best tech stocks to hold for the next five years … and maybe 10 or even 20.
Must-Have Tech Stocks: Digital Realty Trust (DLR)
One of the top plays in technology isn’t actually a part of the tech sector — it’s real estate.
Digital Realty Trust (NYSE:DLR) is a real estate investment trust (REIT) — a tax-advantaged structure that’s required to pay at least 90% of its taxable income to shareholders in the form of dividends — that focuses on data center properties.
The world is using an increasing amount of technology, which requires businesses to use more computing and server power. But owning specialized buildings and all that necessary hardware to keep them running is an expensive proposition.
That’s where Digital Realty comes in.
DLR owns more than 150 data centers across the world that serve clients such as AT&T Inc. (NYSE:T), Rackspace Hosting, Inc. (NYSE:RAX) and Level 3 Communications, Inc. (NASDAQ:LVLT). It hosts firms’ web and cloud services, keeps the data centers cool and running smoothly, then sits back and collects a check.
The steadily increasing need for data housing and server hosting has translated into steady growth. Revenues are up by nearly 50% over the past three years, and earnings have climbed by more than 35% in that time. Those profits also have gotten a lift as Digital Realty has moved into complementary businesses like offering IT solutions to its customers. Those higher-margin businesses have helped pad the firm’s growing dividend, which currently yields 3.1%.
The modern world needs Digital Realty, and that makes it a no-brainer long-term bet.
Must-Have Tech Stocks: Alphabet (GOOGL)
Google parent Alphabet Inc’s (NASDAQ:GOOGL) bull case is just too simple.
No other site even comes close to rivaling Google for search. Yahoo? Nope. Bing? Please. It’s probably incorrect to say that Google has a monopoly, but it might as well. Not only does its search platform drive oodles of ad revenue into its parents coffers, but the company is always improving upon its use of its expansive data mining operations.
In Google’s S-1 filing ahead of its 2004 initial public offering, Google’s revenues sat around $970 million. Last year, that number clocked in north of $90 billion, almost entirely thanks to the growth of search.
But Alphabet is far from a one-trick pony these days. It has the YouTube video streaming platform, which boasts more than a billion users. But Alphabet also has added significant device exposure — Android runs on more than 2 billion devices the world over — not just through phones and tablets, but smart speakers and virtual reality headsets. Then there’s its web-based products, such as Gmail and Maps, the latter of which offers business opportunities through listings and details.
All told, Alphabet offers nearly 160 consumer products.
Alphabet also is emerging as a leader in autonomous driving, with its Waymo project now expanding into testing self-driving trucks.
It’s possible that none of these things will ever replace search ads as Alphabet’s core revenue driver, but they all have massive potential. All the while, GOOGL is a serial cash generator that has the financial flexibility to make more game-changing acquisitions and fund all the R&D it wants. Those, in turn, will keep churning out growth.
Must-Have Tech Stocks: Texas Instruments (TXN)
Semiconductors have been the “it” investment of the past 18 months or so, but most of the press has been focused on the likes of Advanced Micro Devices, Inc. (NASDAQ:AMD) and Nvidia Corporation (NASDAQ:NVDA). But Texas Instruments Corporation (NASDAQ:TXN) — of calculator fame — is a tech name you should cozy up to.
Cloud computing, smartphones, cars, even washing machines all have one thing in common — you can find computer chips inside of them. And that’s great news for TI.
Texas Instruments specializes in analog chips — the basic, boring semiconductors found in every electronic device, from computers to blenders. This segment of the semiconductor market is really more of a commodity business than anything else, but there aren’t a lot of companies that want to enter this low-margin business, giving Texas Instruments and its large-scale operations something of a wide moat.
This baseline business of analog chips have fueled a rapidly rising dividend that has nearly tripled in just five years, though thanks to all of TXN’s capital appreciation, the payout still yields “just” 2.5%.
Meanwhile, Texas Instruments is getting extra “oomph” from recent moves into chips for communications, touchscreens, the internet of things and renewable energy. Those chips have much higher margins than analog chips and are increasing in demand.
There are far more exciting tech stocks out there. But this two-pronged attack will keep Texas Instruments relevant on all fronts, and the outstanding dividend growth will make TXN a total-return machine for years to come.
Must-Have Tech Stocks: Microsoft (MSFT)
Microsoft Corporation (NASDAQ:MSFT) spent a number of years as a punchline in the tech investing space, more appreciated for its income potential than for its ability to grow.
But that all changed when Microsoft nudged Steve Ballmer into retirement and brought search chief Satya Nadella into the CEO role. Nadella took Mr. Softy into the cloud, and it hasn’t come back down since.
Microsoft still dominates the shrinking world of PC operating systems and software. But cloud computing and software as a service (SaaS) is increasingly running the show. MSFT kept its focus on business and large enterprise customers, and as a result, Azure platform continues to grow like a weed. Meanwhile, subscriptions such as Office 365 provide a much more predictable top line.
Investors are also excited about the data-mining potential of social network LinkedIn and its 467 million users.
Microsoft has left the market in the dust, jumping 36% over the past year versus just 16% returns for the broader market. But don’t worry — the old, reliable printing press is still minting cash, with the company generating $33.3 billion in operating cash flow in 2016. That, and a war chest of about $133 billion gives MSFT all the options it could ask for, including more buybacks and dividends that will bolster shareholder value for decades.
Must-Have Tech Stocks: First Trust Nasdaq Technology Dividend Index Fund (TDIV)
Tech stocks are increasingly not just a source of growth, but income — and it’s not just a few isolated names. This is an increasingly attractive feature of the whole sector, so perhaps one of the best tech holdings for the next few years is … well, dozens of them. All at once.
The First Trust Nasdaq Technology Dividend ETF (NASDAQ:TDIV) is an exchange-traded fund (ETF) that tracks a basket of tech stocks, all of them held on the condition that they’ve paid a regular dividend over the past 12 months and not decreased it. Right now, that includes 89 different tech stocks including Microsoft and Texas Instruments, as well as Apple Inc. (NASDAQ:AAPL) and Qualcomm, Inc. (NASDAQ:QCOM).
This basket of steady, dividend-paying tech stocks produces a yield of about 2.8% and has matched the market’s performance over the past three years and has raced ahead over the past 52 weeks.
It’s also pretty cheap to own, at just 0.5%, or just $50 annually on every $10,000 invested.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.