Tech Stocks Are Paying Record Dividends - But Are They Still Sexy? (DELL, IBM, MSFT, ORCL)
What happened to the good old days when stocks were priced in fractions, brokers had a telephone handset on each ear, and tech companies were growth stocks? All of that, including the latter, has changed—at least to some extent.
Technology stocks are supposed to be a trader’s dream. If you’re looking for fast gains, a lot of volatility and some stock market sexiness, you camp out in the technology space. Nothing illustrates it better than 1997-2000, now called the dot-com bubble. During what was something akin to a digital gold rush, investors were happy to pay huge multiples for companies that didn’t show profit or, in some cases, didn’t have a product.
If you were an entrepreneur, you named your company anything with “.com” after it, and the money started rolling in. But it didn’t last. Cisco (NASDAQ: CSCO) lost 86 percent of its value while Amazon.com (NASDAQ: AMZN) fell from $107 to $7 along with the glut of companies that went out of business. (In part because they were never really in business to begin with.)
While some of the technology craze returned, a new term has emerged: Old tech. Old tech refers to companies like IBM (NYSE: IBM) Cisco, Microsoft (NASDAQ: MSFT), Oracle (NASDAQ: ORCL), Dell (NASDAQ: DELL), and Intel (NASDAQ: INTC) just to name a few.
What do they all have in common? Something that was once unheard of in the technology space: Each pays a dividend. Bloomberg reported that tech companies paid $11.9 billion in dividends last quarter-with an average dividend yield of 1.21 percent. That’s the first time the average exceeded 1 percent in 15 years. And they aren’t token dividends like some of the banks. Current yields look like this:
- IBM- 2 Percent
- Cisco- 2.7 Percent
- Microsoft- 2.7 Percent
- Oracle- 1.5 Percent
- Dell- 2.4 Percent
- Intel- 3.9 Percent
But the real shock came when the bellwether for all-things-tech announced a dividend. Apple (NASDAQ: AAPL) now yields an impressive 2.9 percent. For technology investors, this signaled Apple’s move from a high flying young tech name to a mature, less volatile name.
But is the serotype deserved? Are these “old tech” names really as boring as dividend paying stocks in other sectors? Looking at beta, a measure of volatility, we found that the above seven stocks had a beta of 1.15—making the group as a whole slightly more volatile than the S&P 500.
If we look at what one might call, young tech—companies like Zynga (NASDAQ: ZNGA), Groupon (NASDAQ: GRPN), Facebook (NASDAQ: FB), Rackspace (NASDAQ: RAX), LinkedIn (NASDAQ: LNKD), Pandora (NYSE: P), and RenRen (NYSE: RENN), they pay no dividend but have an average beta of 2.0—twice as volatile as the S&P.
Of course, comparing the average beta of 14 stocks isn’t exactly a scientific assessment but it does show that a tech company that pays a dividend does function more like a dividend stock than the sexy tech stocks that investors love.
On the other hand, looking at the performance of some of those young tech names, Microsoft and IBM are looking pretty good these days. As they say, sometimes beauty is only skin-deep.
Disclosure: At the time of this writing, Tim Parker was long Apple.
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