Steer clear of the tempting dividends from US tech stocks

If you’re looking for juicy dividends, the last place you’d traditionally expect to find them is in the notoriously stingy tech sector. Yet, in 2012, the S&P 500’s tech sector topped the dividend table for the first time ever, providing 14.7% of all dividends paid to investors, up from 10.3% in 2011 and just 5% back in 2004.

It even overtook the trusty consumer staples sector (think Procter & Gamble, Wal-Mart and Philip Morris), which had been the most generous for the prior three years.

That said, it doesn’t mean that income-hungry investors should pile into tech stocks now. Firstly, the sudden jump in pay-outs is mainly down to one company, Apple, which began paying dividends in March to assuage shareholders who accused it of sitting on too much cash.

Four other technology companies that had previously been dividend misers joined in. While 42 out of 70 tech stocks in the S&P 500 now pay some sort of dividend, decisions by these bigger players can easily change the average yield for the entire sector.

Beyond the concentrated nature of the sector, there’s another reason to be cautious: stockmarket history. Just before the financial crisis of 2007 banks were splashing the cash. In fact, in 2008 they were offering 30% of all S&P 500 dividends. But that plunged to 9% in 2009.

In short, volatile, hugely cyclical growth sectors don’t turn into income-paying safe havens overnight just because they start making decent dividend pay outs. That’s why long-term income investors should always make sure they’re not too reliant on the fortunes of one key sector.

Merryn

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