Why income investors can’t ignore bigtech stocks

Contrary to popular perception, income investors should be seeking out bigtech stocks – and notably those from the Magnificent Seven – as a reliable, consistent and high-returning source of dividend payments, according to a leading global investment manager.

Richard Saldanha, a senior portfolio manager at UK investment firm, Aviva Investors, argues that increased exposure to bigtech stocks, including ‘Magnificent Seven’ high performers such as Microsoft, Apple and Nvidia, can provide investors vital portfolio diversification whilst also helping them take advantage of long-term structural themes, such as the growth of generative artificial intelligence (AI), cloud computing, digital payments, and network infrastructure.

Beyond the so-called bigtechs, Saldanha believes that regular income can also be realised from companies not typically associated with dividend payouts, such as industrials.

“Casting a wider net in this way, rather than restricting allocations to more ‘traditional’ income sectors, could be a particularly useful strategy in the current environment,” he said.

“While fears of a recession have abated and labour markets and consumption look strong, inflation is not yet fully under control. Central banks are expected to cut rates – but when, and by how much, are open to debate.”

While, as Saldanha conceded, dividend yields in the tech sector remain relatively low – for instance, Meta’s dividend equates to a forward yield of less than 0.5 per cent – there are prospects for substantial growth due to the continuing strength of their cashflow.

IT and industrials stock dividends have nudged 8% growth in returns annually over the last five years, with only the energy sector beating out the pair.

Bigtechs do pay out

Saldanha has sought to break the widely held perception that bigtechs do not pay dividends.

Traditionally, dividend payments have been associated with ‘mature’ industries with fewer growth prospects, such as telcos or utilities. High-growth tech companies, on the other hand, “have long had a reputation for focusing on other means of capital allocation, such as buybacks or mergers and acquisitions”, Saldanha said.

“But the reality is the likes of Microsoft and Apple have been paying dividends for years.”

However, several bigtechs are only now getting into the dividend game.

This year, social media giant Meta, owner of Facebook, WhatsApp and Instagram, announced its intention to for the first time pay shareholders a dividend. Google’s parent company Alphabet, also announced last month it would pay out a cash dividend of $0.20 per share before the end of FY2024, with quarterly cash dividends thereon.

According to Saldanha, however, this increasing preference for dividend payments merely continues a long-term trend.

Bank of America analysts predict another “banner year for dividends” in 2024, off the back of a more than 22% jump in dividend payments among S&P500 firms since 2022, with the investment banking giant citing the importance of regular income in an environment of macro uncertainty.

Saldanha cited the launch, in 2019, of the S&P’s Technology Dividend Aristocrats Index, which reflected the increasing number of tech companies not only paying dividends, but also increasing their payouts.

“The companies in the index have tended to increase their dividends every year for at least seven years, through different economic environments and significant periods of recession.”

While income seekers will undoubtedly look to US stocks, with payouts expected to “grow among a number of the US-listed technology names we invest in”, Saldanha said, opportunities abound in other markets, particularly in the UK.

“From a yield standpoint, we find companies in Europe represent interesting opportunities and we are still seeing attractive dividends in that market. This is also true of some emerging markets in Asia.”

“There are also numerous great companies in the UK. Firms such as Unilever, the London Stock Exchange or RELX (information services) are industry leaders and have a global reach, which is important from a diversification standpoint.

“In our opinion, valuations of UK-listed companies also tend to be relatively more attractive than their US counterparts.”