The latest dividend research from FactSet should raise some eyebrows, on two counts.
One, dividends are continuing to break records: “Over the year-ended 2012, $310 billion have been paid out in dividends, which is a ten-year high for trailing twelve-month periods.”
And two, when it comes to dividend growth, there’s a new ringleader in town – tech: “Information technology… led all sectors in year-over-year growth on a per-share basis at 46.1%.”
The sector’s average yield hit a new all-time high of 1.56% on February 28, as well. While that’s on the low end compared to telecom and utilities – yielding 4.4% and 3.9%, respectively – remember that tech is still in growth mode. Expect bigger yields down the road.
Now, taken from a bird’s-eye view, this is all-around good news for income investors. More dividends? Yes, please. The more the merrier, as they say.
But the fact that tech is starting to make up a larger slice of the dividend-growth pie, well, that is a problem…
Bright, Shiny Things
As attractive and hip as technology stocks are, the businesses behind them are complicated, prone to hype and speculation, and – in turn – risky.
For dividend investors – who usually desire long-term safety, substantial yield and income growth all in one tidy package – this poses an obvious problem: The biggest dividend growth is now coming from the sector that’s also arguably the most difficult to analyze.
In other words, there be dragons.
There are exceptions, of course. Because some of that dividend growth is a result of the growing maturity of tech companies, as mainstays switch from equity growth mode to dividend growth mode.
Microsoft (MSFT) is an excellent example of this. The company is a behemoth and its stock prices are more than stable. But its days of impressive stock growth are over.
Accordingly, to provide shareholders value, it now puts a lot of shoulder into its dividends. Case in point: Its three-year average dividend growth rate clocks in at 18.37%. As such, there’s little danger in recommending Microsoft as a long-term income investment.
On the flip side of this, there are tech companies out there using dividends like a carrot on a stick, pulling unwitting investors into volatile, even failing, equities.
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Up until Nokia (NOK) dissolved its dividend in January, it was guilty of exactly that. (Louis Basenese pegged the dividend’s demise months in advance.) And if there’s any question of how much interest investors had in its dividend, consider that, immediately following the cut, the stock tanked 10%.
The message here is simple: Be careful. Tech stocks have a whole lot of upside, but for the purpose of getting steady income, upside should be one of your last concerns. There’s a place in your portfolio for higher risk tolerance, but not here.
On that note, here’s Louis Basenese’s with a warning regarding one ailing tech company that’s keeping investors around with an unsustainable dividend. Better take heed:
Look out, it’s a trap!
Hewlett-Packard (HPQ) has been increasing its dividends, trying to woo investors into buying up its troubled stock. Over the last three years, it’s averaged a dividend growth rate of 20%.
This month it came back with another increase, raising quarterly payments 10%, from $0.1320 to $0.1452 per share.
Raises are all well and good, but not when you’re looking at a stock that’s barely managed to return 2.26% over the last year, compared to 13.96% for the S&P 500.
Even more so when you consider that 40% of HP’s operating income and nearly half of its revenue comes from printers and personal computers.
The company may be the market leader in both for the moment, but in the long term, the space will become harder and harder to secure as transitions from PC to mobile, and physical to cloud solutions transform the industry.
Bottom line: Making such a big bet on a small-time yield of 2.49% just doesn’t add up. Especially when you consider that HP’s earnings nightmare (read: it doesn’t have any) means that the dividends just aren’t sustainable. If anything, expect a cut or full-on suspension coming soon.