Should income seekers turn to technology funds?

As bonds offer historically low yields, the technology sector is increasingly being viewed as a credible alternative in the hunt for income.

Industry experts believe the sector is an overlooked yet lucrative source of dividends, and should not be viewed as only suitable for growth investors.

In the boom days of the 1990s, technology companies rarely gave an income and instead concentrated on growing at a lightning-fast pace that meant any capital had to be reinvested back in to the business. However, as the sector has become more established, investors have increasingly sought regularity of return and there are signs the market is responding to this.

Rising dividends

Following the passing of founder Steve Jobs, who famously refused to pay out to investors, Apple issued its first dividend since 1995 in August this year, of $2.65 per share. Cisco, the network equipment manufacturer, pushed its dividend up 75 per cent in the same month, causing its stocks to jump 9 per cent, and Microsoft has consistently grown its dividend since 1993.

Although tech giant Google still pays out nothing at all, there is evidence its growth is slowing, suggesting it may follow suit.

These factors helped technology stocks to proportionately give the highest dividends of any large cap sector in the S&P index, according to Howard Silverblatt, a senior S&P analyst. They are set to pay out $45.10 per share in total dividends over the next year, according to Bloomberg data released in September, a record high for the technology sector.

Fran Radano, is senior investment manager on the Aberdeen North American Income Trust, which has information technology as its fourth largest holding. He believes technology companies are “belatedly beginning to admit their age.”

“Apple, while admittedly is still in its growth years, has a mountain of cash, some of which it has finally returned to investors. As time goes on we would expect other tech companies to commence paying dividends,” he said.

Peter Vanderlee is manager of the Legg Mason US equity fund, of which 12.56 per cent is technology stocks, with Apple as the second largest holding. He agreed that technology companies have shifted their perception of dividend pay outs, but said there is still a long way to go.

“These companies have the finances to increase the dividend. If you look at the payout ratios you see that in general technology stocks pay out very low, around 20 per cent on average,” he said.