An Old Tech ETF As A Yield Play

There was a time when “technology sector” and “dividends” did not belong in the same sentence, unless that sentence was saying the former did not deliver much of the latter. Times, of course, change, and when it comes to changing times for technology stocks and dividends, times are changing for the better.

In addition to being one of the biggest contributors to the buyback boom of recent years, technology stocks have also been major drivers of the S&P 500's dividend growth since the financial crisis. In fact, technology, the S&P 500's largest sector weight, is now one of the benchmark U.S. equity index's biggest dividend-paying groups in dollar terms.

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Still, the Technology SPDR (ETF) XLK, the largest exchange-traded fund by assets tracking the sector, does not scream “yield play.” XLK's trailing 12-month dividend yield is 1.92 percent. Well, these days, that might actually qualify as a yield. XLK's trailing 12-month dividend yield is about 50 basis points higher than Monday's closing on 10-year Treasurys.

What's Going On

Much of the technology sector's dividend growth, and that of XLK, is attributable to old school tech names, such as Microsoft Corporation MSFT and Cisco Systems, Inc. CSCO. However, Apple Inc. AAPL has proven to be an impressive dividend grower over the past several years. Those three stocks combine for nearly 26 percent of XLK's weight.

“Right now, the traditionally defensive sectors — Utilities, Staples, and Telecom — are the main beneficiaries on account of a shortage of high-quality US dollar assets. Anyone can explain to an investor that these three equity sectors have similar duration and asset-like quality characteristics as bonds,” said Rareview Macro founder Neil Azous in a note out Monday.

Azous further highlights the utility of old school technology stocks in a low yield environment with the following analysis. A screen of large-cap stocks with credit ratings of A- or better and dividend yields higher than the yields on their corporate bonds with seven years of maturity or longer turns up S&P 500 names.

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“For example, old-technology — MSFT, CSCO, INTC, QCOM, TXN, IBM, etc. — meet this criterion. Surprisingly, this space has received very little airplay during this entire yield crunch,” said Azous.

XLK is up 3.6 percent year-to-date. That trails the S&P 500, but the tech ETF is also well ahead of the Nasdaq Composite.