Income investors have become increasingly interested in technology companies as their cash levels continue to climb, but investors need to be wary as the sector remains predominantly focused on growth, Kames Capital has warned.
Insatiable demand for the latest technology has left tech giants like Apple with huge cash piles on their balance sheets, which shareholders are calling to be returned to them in the form of dividends. To a large extent this is being heeded: over the last ten years, the number of dividend-paying tech stocks on the S&P 500 has more than doubled, while Apple has become the biggest payer of dividends in the index, overtaking oil giant Exxon Mobil.
Other tech giants, such as Cisco and Intel, have also become important stocks for income investors, and the sector recently overtook the financial sector to become the largest contributor of dividends to the S&P 500, accounting for 15 per cent of total dividend pay-outs.
But while this shift has increased options for income-seekers, Kames says investors need to treat the sector with caution.
“All else being equal from a dividend yield or capital return perspective, it will always be riskier for an income investor to choose a technology stock over a staple food producer, for example, which offers predictable cash flows and a proven record of paying dividends to shareholders,” says Craig Bonthron (pictured), a global equities manager at Kames.
“We constantly question whether cash flows at technology companies are sustainable and if their market shares’ are vulnerable to disruption.”
While Kames’ global equity team recognises the potential for technology stocks to generate income returns, Bonthron warns this should not outweigh the risks to investing in technology, which is often centred on disruptive growth rather than income.
“The majority of technology investors are looking for growth, not income, because that is what technology offers: a disruption to the way the world works,” he says.
“Even mature, valuable technology businesses are always in the crosshairs of new, growing businesses, and while they may create value, they are constantly under threat. Therefore we have to tread carefully.”