Many people don’t know it, but tech companies account for nearly 15% of total dividend payouts for the S&P 500 Index. That’s the single largest sector contribution among the 10 broad sectors; and it’s triple what tech stocks delivered a decade ago, according to S&P Dow Jones Indices. For investors focused on dividends in tech companies, one cue could be cash. Cash represents as much as 25% of the valuation of some tech stocks. For investors, that cash might indicate significant potential for growth in dividend and growth in general.
Market Realist – Technology stocks could see an increase in dividend yield.
The graph above shows the market capitalization along with the cash and equivalents of some of the top technology companies (IYW). These companies generated an enormous amount of cash over the last few years.
By market capitalization, Apple (AAPL) is by far the biggest company in the US. It has a market cap of ~$750 billion and ~$194 billion in its reserves. Microsoft (MSFT) also generated a huge amount of cash and equivalents—this is ~25% of its market cap. Oracle (ORCL) has cash and equivalents of $43.7 billion—this is ~23% of its market cap.
Over the last six years, Apple’s earnings grew at a CAGR (compound annual growth rate) of 42.5%—this is astonishing! Google’s (GOOG) earnings grew at a CAGR of 16.7% during the same period. Cisco (CSCO) maintained double-digit earnings growth at 10.1%. IBM’s earnings hardly budged in the last six years.
Robust earnings growth, low leverage, and financial stability could cause mature tech companies to increase dividends by a large margin in the future.