There are some pretty diverse styles and stocks that fall under the heading of investing, but nothing is more synonymous than growth investing and technology stocks. After all, new devices, software and future equipment scream economic expansion and fast-moving markets. The fast movers are still there, Salesforce.com (NYSE:CRM) is just one example, but the technology sector seems to be making major strides toward maturity.
Today's tech sector is far removed from the land of the dotcoms era, when "all hype, no revenue" companies such as Globe.com were the sector's primary go-to investment. During the Internet boom, many companies in the sector were new businesses, committing capital to research and development and M&A efforts. However, a decade after the tech bubble burst, many of those surviving companies have matured into firms with strong balance sheets and financial flexibility. That financial stability is leading to one thing - big dividends.
For those investors looking for income solutions, the technology sector now offers one of the best stomping grounds to find growing payments.
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Big Cash Balances and Dividend Growth
While most income investors flock to boring utilities or consumer staples firms when looking for equity income, they may want to focus their attention on the high-tech world. The technology sector is quickly becoming a leading dividend machine. According to S&P, technology stocks now account for 14.22% of the dividends paid out by members of the S&P 500; that's up from 5.95% in 2007. Currently, 41 of the 71 tech stocks in the S&P 500 pay dividends.
What's more impressive is that the list continues to grow. Moody's projects that the tech sector will pay out roughly $26 billion in dividends in 2012. That is an increase of 14.3% from 2011 and higher than the 10.9% average annual dividend growth of the prior four years. For example, Apple Inc. (Nasdaq:AAPL) paid its first dividend ever this summer, while Cisco Systems (Nasdaq:CSCO), which only started paying a dividend in March of 2011, and Microsoft (Nasdaq:MSFT), which began paying in 2003, both increased their dividends in August.
Likewise, the sector's dividend growth rates have surpassed other traditional equity income safe-havens. Over the last five years, ending in April 2011, technology stocks have increased their dividend payouts by roughly 16.49% annualized. That bests utilities (5.09%), consumer goods (6.36%) and telecom firms (6.05%) by a wide margin.
SEE: The Perks of Dividend Reinvestment Plans
Long-Term Dividend Growth Ahead
There are plenty of bullish catalysts that will help drive the sector's growing payments into the future. First, our ever-more-complicated lives revolve around technology. It seems that everything we touch - from our cell phones to our toasters - has some form of microchip inside. Internet usage continues to grow at a rapid pace, as has the adoption of computers and smartphones.
As this relationship with technology continues to advance, the long-term demand for semiconductors, communications gear, software and other high-tech equipment is assured. In the emerging world, as middle class incomes continue to rise, this bond with technology is just beginning. As these citizens embrace technology, the sector will continue to thrive.
The fact that technology has become an indispensable part of our lives is also producing tons of cash for firms that operate in the sector. Many of the former high-flying tech darlings of the dotcom days have matured into money-hoarding kings as their software, servers and services bring in a steady flow of cash. For example, Apple has roughly $110 billion in cash on its balance. Those huge balances enable tech firms to not only plow some of that money back into growing the company, but also pay shareholders handsomely.
Overall, the long-term trend toward more technology usage, plus the current cash flow trajectories of the sector's firms, is a win-win for income seekers.
SEE: How Technology Can Save You Money
Buying Some Tech Yield
For investors wanting to add some high-tech dividends to a portfolio, the individual stock route is certainly doable. A host of tech stalwarts like Dell (Nasdaq:DELL), Oracle (Nasdaq:ORCL) and Qualcomm (Nasdaq:QCOM) all pay growing dividends. However, a broad approach could be best.
The new First Trust Nasdaq Technology Dividend Index (Nasdaq:TDIV) is an ETF that tracks a basket of high-tech dividend payers. For inclusion in the ETF, each security must have a minimum market capitalization of $500 million, have a minimum three-month average daily dollar trading volume of $1 million and have paid a regular or common dividend within the past 12 months that yielded at least 0.5%.
Despite being new, the fund could offer investors the best way to play the technology sector's rise as a premier income-seeking stomping ground.
SEE: How To Pick The Best ETF
The Bottom Line
Despite its go-go glory days, the technology sector is maturing into a dividend hunter's paradise. Payouts are on the rise and cash flows remain robust. For investors, the sector offers some of the best dividend growth opportunities around and proves that tech isn't just for growth anymore.
At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.
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