Buy these 3 tech stocks and 2 ETFs that will continue boosting dividend payments to shareholders as the economy recovers, CFRA says

  • In Q1, 906 US companies raised or initiated a dividend, up 24% from a year earlier.
  • Many tech companies increased their dividends, and there are some that will continue to do so.
  • CFRA lays out 3 stocks and 2 ETFs it sees offering dividends for the foreseeable future.
  • See more stories on Insider’s business page.

Despite technology stocks displaying below-average dividend yields, more than half of the sector’s names in the S&P 500 distributed some earnings to shareholders at the end of the first quarter and will continue to do so as the economy recovers, according to CFRA. 

In response to the business slowdown that was caused by the pandemic, many companies trimmed or slashed dividend payments as they looked to preserve cash and maintain healthy balance sheets. 

However, dividend growth is returning in 2021, with 906 US companies either having raised or initiated a dividend by the end of March. That’s up 24% from the previous year, according to Todd Rosenbluth, the head of ETF and mutual fund research at CFRA, in a recent note to clients. 

There are now more S&P 500 companies that pay dividends versus those who don’t. In fact, the median dividend increase for S&P 500 constituents in the first quarter was 7.7%. That’s up from 6.5% in the fourth quarter of 2020, 4.2% in the third quarter, and 4.8% in the second quarter of that same year, according to S&P Global data. 

Furthermore, according to Jefferies Global Equity Strategist Sean Darby, buybacks and dividends should accelerate as US companies are currently holding high levels of gross cash to total assets. Also, ex-Morgan Stanley investor and Hightower partner JR Gondeck recently said he believes the markets will see the “largest increase in dividends in American history” this year. 

Although many companies might distribute some cash to shareholders, it’s the companies within the information technology sector that offer unexpected money from dividends, Rosenbluth said. 

By the end of the first quarter, the S&P 500 dividend yield — dividends per share as a percentage of price — was at about 1.5%, while the yield on IT stocks fell to about 1% from 1.3% two years earlier. Yet, 59% of IT stocks paid a dividend at the end of March, while only 49% of the names in the consumer discretionary sector — which also largely comprises of growth-oriented companies — returned cash to shareholders in the form of dividends, he added. 

CFRA

Additionally, some technology companies substantially raised their dividends in recent months. 

5 securities that will continue returning cash to shareholders 

During the first quarter, semiconductor companies Analog Devices (ADI) and Applied Materials (AMAT) raised their quarterly dividends by 11% and 9.1% respectively; and they aren’t planning on stopping anytime soon. 

ADI has committed to return nearly all excess free cash flow to shareholders while AMAT announced it would return 80% to 100% of excess free cash flow to shareholders. 

“CFRA Equity Analyst Angelo Zino expects a favorable semiconductor environment to result in record-high free cash flow generation in 2021 and 2022, which he believes will support greater return to shareholders,” Rosenbluth said. 

But even if individuals consider jumping on the dividend-growth bandwagon to capitalize from the information technology area, they might face challenges in finding sufficient exposure to it through ETFs. According to Rosenbluth, many of the larger dividend-growth ETFs have limited exposure to the industry. 

For example, the $78.5 billion ProShares S&P 500 Aristocrats ETF that focuses on companies that have paid and grown dividends for at least 25 consecutive years, and the $60 billion SPDR S&P Dividend ETF have approximately 3% of assets tied to the sector given that many companies haven’t been raising dividends for two decades or more. 

However, for those looking to gain income through dividend payments from tech companies, Rosenbluth is recommending the First Trust NASDAQ Technology Dividend Index Fund ETF (TDIV), which owns current dividend-paying IT or telecommunications companies. He also recommends getting a hold of the ProShares S&P Technology Dividend Aristocrats ETF (TDV), which requires a paying company to have raised the dividend for seven consecutive years. 

“CFRA thinks both TDV and TDIV are appealing and are likely to outperform the broader equity category over the next nine months,” he said.

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