Investment Strategies
Income-Hungry Investors Should Look To US Tech Sector - ClearBridge

Investors looking for income should be eyeing the US technology sector in anticipation of even greater dividends payouts by these companies, says Peter Vanderlee, portfolio manager at the Legg Mason subsidiary ClearBridge Advisors.
Investors’ current hunger for dividend-paying stocks internationally is well known, against a backdrop of rock-bottom interest rates, but in the US, with Treasury and corporate bond yields near record lows, their desire is even more pronounced, Vanderlee notes.
What we seem to be seeing is a “perfect storm” around US technology firms, as many have now begun to mature and return cash to their shareholders. Indeed, ClearBridge points out that three technology companies have initiated a dividend in the S&P 500 this year, while 38 US tech names have raised their dividend levels in the past twelve months. In 2002 only 20 per cent of S&P 500 tech firms paid a dividend, but at the end of this year this had risen to 53.5 per cent.
And the tech sector is going to get more and more interesting in terms of dividend provision, according to Vanderlee. It is not just that many tech firms have a lot of cash on their balance sheets, scant debt and abundant cashflow, but to date dividend ratios have been somewhat conservative. “That means that despite the recent trend of more meaningful dividends out of technology companies, there is still a long way to go,” he said.
One of the key drivers of tech firms moving to boost dividends is that they are using them as a way of attracting investors who are focused on value and income in order to diversify their shareholders bases.
“The inclusion of dividends in their capital allocation framework represents a departure from the traditional vectors of share buybacks and acquisitions. This change in behaviour is further supported by the tendency of stock prices to respond favorably on announcements of significant dividend initiations and increases,” Vanderlee said. We can note, for example, that Cisco’s share price jumped when it upped its dividend by 75 per cent this summer.
He went on to explain that the stock market is providing a “positive feedback loop creating momentum and pressure for other companies to follow and begin paying dividends or significantly increase their dividend.”