Roundtable discussion: Can tech sector become an income play for investors?

Large cash positions supportive

The astonishing growth of technology companies in the past few years could lead to them becoming attractive income generators in a post-Covid environment, multi-asset investors say.

The sector's strength through the Covid-19 pandemic has left many of the world's biggest tech companies with large cash positions that could be put to use through dividend payments, panellists argued at a roundtable entitled 'Dividends versus Coupons' on 21 April  hosted by Investment Week and SPDR ETFs at State Street Global Advisors (SSGA).

Other areas of the growing technology infrastructure, such as data centres, could also prove interesting to those seeking income in a low-yield environment.

Ben Jones, senior multi-asset strategist in the Macro Strategy team at State Street Global Markets, said the technology sector was among several areas of the equity market not traditionally considered as a reliable income payer, but companies are starting to look more attractive.

Jones explained: "One of the areas that I am looking at very positively, not just from a capital appreciation perspective but also an income perspective now, is the technology sector.

"[Last year] has really shown that tech is becoming in some ways a defensive sector. The income streams and the quality of earnings have become far more reliable over recent years and, in some cases, recurring.

"That means you have got these very steady cash flows being generated and that in turn means that dividends are likely to remain very stable… and forecasts are for dividends to increase quite significantly."

Ahmed Behdenna, senior portfolio manager at Aviva Investors, backed up Jones's point by highlighting that, although investors may have an income focus, it did not mean they could not participate in "long-term structural growth trends".

"There was, for example, a view that technology was not a sector that income investors would be participating a lot in, simply because the big names do not carry a dividend yield," he said.

"But if we look at the ecosystem around those names, and I think for example as a sector, data centres in the US, those names are exposed to those long-term trends and do carry actually quite an interesting dividend."

He emphasised the importance of "thinking a little bit outside the box" and away from "what has been the norm for income for the last few years, if not decades".

Several of the largest listed tech companies in the US have experienced significant share price increases and grown their cash balances since the start of 2020.

Amazon's share price rose 73.7% during 2020, and by the end of the year had $42.4bn in cash on its balance sheet, up from $36.4bn at the end of 2019.

Facebook, Apple, Amazon, Microsoft, Netflix and Alphabet between them had more than $86bn in cash on their balance sheets at the end of last year.

Of these six tech giants, only two currently pay dividends. Apple paid out $0.80 per share in 2020, 24% of its earnings per share according to Forbes analysis. Microsoft paid $1.58 per share, although it cancelled its first quarter payment.

Wayne Nutland, Premier Miton's head of managed index solutions and manager of the Premier Miton Managed Index Balanced fund, supported the idea of the technology sector as an emerging income play.

"I think looking in other areas for income is very important if only to balance out the factor exposure of the portfolio.

"I think being able to access income from those growthier parts of the market is really important for a balanced portfolio, particularly if this long-run, sub-trend growth dynamic returns in the major economies in the next ten years." 

Click here to view the full roundtable write-up.