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It’s no secret that the election of President Trump has continued to push up the market on the whole. As his promises of lower regulation and taxes have spurred an idea of pro-growth, investors have rushed into stocks in a big way. The problem is not all of the market’s various sectors are participating evenly. In fact, one very “growth-oriented” industry has seen its share of market declines in recent weeks since the election.
I’m talking about tech stocks.
As investors have played into the narrative that Trump will reignite U.S. manufacturing, faster-moving tech stocks have taken a backseat to their more industrial rivals. Manufacturing is in, cloud computing is out.
And while the major industrial stocks could become dividend investors’ best friends, the opportunity to load up on some quality tech names that pay great dividends is too appealing. This is a time when investors may want to go against the herd.
Find out when tech stocks will declare their next ex-dividend dates in our Ex-Dividend Date Search.
In a lot of ways, the Trump Administration is a big 180-degree turn from the last few years. One of the most significant shifts is in the economy. With Trump negotiating trade deals and push for boosting GDP through manufacturing, the tech sector has been left by the wayside. That’s a big change from the last few years when FANG stocks like Google (GOOG ) have ruled the roost.
And there are some reasons to be concerned.
The administration’s crackdown on immigration and so-called H1-B visas that allow many foreign workers to obtain jobs in Silicon Valley could hurt major tech stocks. The sector has been the primary recipient of such visas over the years. Moreover, Trump’s overall “America First” protectionist attitude could crimp the industry as most tech stocks make the bulk of their revenues overseas. The recent stronger dollar hasn’t helped either.
In addition, domestic plans such as Trump’s mega infrastructure plan are expected to send more money towards the goods manufacturers rather than the data miners. Trump is planning on spending $1 trillion on roads, bridges, and other physical infrastructure.
With that in mind, investors have undergone some major sector rotation out of tech and into the manufacturing-based names. Just check out the below chart of the Industrial Select Sector SPDR Fund (XLI) versus the Technology Select Sector SPDR Fund (XLK). The two ETFs track all the S&P 500 stocks in their respective industries. You can clearly see the big uptrend in the XLI since the election in November.
One of the reasons why value investors tend to outperform is that they zig when other investors are zagging. And this is one instance where investors may want to follow their lead. To be clear, tech stocks have had an incredible run and are still seeing some gains since the election and transfer of power. They are still way cheaper than the industrial names on several key parameters.
On a full year price-to-earnings ratio, the XLI clocks in at around 22. Tech stocks can be had for a P/E of just 17. The same can be said for price-to-book ratios, with the XLK coming in cheaper. But perhaps, the biggest draw for income investors is that tech stocks are selling for much cheaper on a price-to-cash flow basis.
Tech’s cash flow generation is unrivaled in the markets. The reason being that most firms have very little overhead. Their biggest costs are personnel and salaries. As a result, margins for the major tech companies are huge. That’s left many with a unique problem: They have more cash than they know what to do with.
Under that scenario, they’ve been handing it back to investors in spades. Over the last 10 years, tech has managed to grow its average dividend payments by nearly 25%. That’s about 10% more than consumer services, which is the next highest sector, and about 19% more than last-place financial stocks. So investors are paying less for firms that are generating larger cash flows and handing more of those cash flows back to them.
Meanwhile, several of Trump’s ideas could actually benefit the sector. His plans to allow firms to move overseas cash back to U.S. tax-free could be a windfall for the tech industry. A lot of businesses such as Apple (AAPL ) have the bulk of their cash locked up overseas. Cisco’s (CSCO ) CEO John Chambers explicitly stated that if the plan goes through, you’ll use the money to boost dividends and buybacks. CSCO already yields more than 3%.
And let’s not forget the tech’s growth potential is well intact. Mobile computing, Internet of Things (IoT) and the shift to the cloud, are all still growing like weeds. Demand for these new services and devices will continue far into the future. Ironically, the industrial IoT and using machine learning in manufacturing is set to be one of the biggest trends of the next decade. That will continue to strengthen the sector’s already big-time cash flows and dividend growth.
Find out the sector’s average dividend yield. The segment is further divided into more than 30 industries. You can get the latest company count and the dividend yield of those industries all on that page.
For investors and serious dividend hunters, the answer is clear: Buy the recent tech underperformance. The sector is ripe with plenty of high-quality names that have become very shareholder friendly over the past few years. You certainly could buy individual names or even the XLK. However, those looking for a broad choice could take on the First Trust NASDAQ Technology Dividend (TDIV).
TDIV tracks a basket of tech firms that have consistently increased their dividends over time and have the potential to keep those payouts going into the future. This includes stalwarts like Microsoft (MSFT ) and Oracle (ORCL ). All in all, the ETF provides access to 95 of tech’s best dividend opportunities.
In any case, however, if you choose to play the recent tech dip, you should be able to lock in high-quality dividends at a low price. Don’t let the opportunity pass your income portfolio by.
Need some help finding individual names? Check-out some high-dividend names here.
Find out which tech stock will declare its next ex-dividend date in our Ex-Dividend Date Search.
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Check out the securities going ex-dividend this week.