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Friday, May 2, 2014

Old tech is new darling of equity income investors

The more mature technology companies,
such as Apple, Cisco and Microsoft,
are all paying cash back to investors.
Technology stocks have never been the best friend of the equity income investor. Until the financial crisis struck in 2008, the yield on the MSCI Global Technology index remained resolutely below 1 per cent, with many tech companies simply not having the free cash flows to pay meaningful dividends. Those that did generally preferred to splurge on acquisitions as they chased market share in a frenetic land grab.

And even after the global stock market sell-off briefly pushed yields above 2 per cent in late 2008 and early 2009, they sank back to little over 1 per cent in 2010.

However, yields have since climbed back above 1.5 per cent and some equity income fund managers, at least, are starting to take note.

“Traditionally, technology companies never really paid dividends, so we were unable to make investments, resulting in us being structurally underweight technology for a long time,” says Nick Clay, co-manager of the £4bn Newton Global Higher Income fund.

“However, of late some of the more mature technology companies have started paying dividends and are increasingly doing so. You have the likes of Apple, Cisco and Microsoft, which are all paying cash back to investors.”

Jill Cuniff, president of Seattle-based Edge Asset Management, which manages $7bn in equity income funds, adds: “Back during the tech boom a lot of people thought these companies could not grow and [simultaneously] pay a dividend.

“We don’t think that is true. A lot of them are sitting on a lot of cash. M&A [merger and acquisition] activity has slowed down, therefore a lot of that [cash] is flowing back to shareholders in terms of dividends and buybacks. We don’t believe this is temporary.”

Mr Clay’s Newton fund now has a higher allocation to technology stocks than at any point since its launch in 2005, with its 8.1 per cent weighting only a little below its benchmark of 9.5 per cent.

Tech Reviews by The Corliss Group

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