Talking Point  

Have tech stocks earned a place in equity income portfolios?

This article is part of
Guide to equity income and dividend investing

 

“Within the IT sector, there are some large companies that have recently started paying dividends. These companies certainly have the capacity to pay significant distributions as they generate a lot of cash from their operations,” he says.

“However, until recently they have chosen to return excess cash through share buybacks rather than dividend distributions.

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“For example, Alphabet spent 60 per cent of the cash it generated in 2023 on buying back its own shares, the equivalent of a 3.3 per cent buyback yield. Similarly, over 10 years Microsoft has spent 30 per cent of the cash earnings that it made on buying its shares.

“Most large technology companies yield well under 1 per cent, and while the scope for paying more in the way of dividends is certainly there, whether the company pays them or not depends on the preference for buybacks.”

Another more recent feature for hyper-scale tech companies is a rapidly increasing investment of cash into developing AI services and tools, Peters says.

“While there is still cash left over after these investments, it has marked a significant shift in business spending. Whether this spending boom lasts is a matter of speculation, but is a factor that could contribute to less dividend growth than there otherwise might have been.”

Chloe Cheung is a senior features writer at FT Adviser