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All Contents © 2017The Kiplinger Washington Editors
By Aaron Levitt
| August 9, 2017
The fizzling of the FANG stocks has many retirement investors souring on tech stocks. And it’s easy to understand why. Given their “growth” focus, they also come with a hefty dose of volatility. Investors in or near retirement simply can’t handle the potential for big-time losses. There’s only one problem with this thinking.
It’s not entirely true.
Yes, there are plenty of high-flying tech stocks. But you know what there are more of? Tech stocks that are mature enterprises that are just minting cash. Cash that they are increasingly sharing with their investors via rising dividends. Since 2012, tech stocks have managed to increase their dividends by 17.11%. This crushes the rates of dividend growth from traditional dividend sectors like utilities and consumer staples.
What’s more is that the tech sector’s payout ratios are lower and their free cash flow yields are higher, meaning they have much more room to keep the cash hitting investor’s wallets.
That’s exactly what you want if you’re a retirement investor!
With that in mind, here’s one tech stock, one exchange-traded fund and one mutual fund to get your tech game on.
Prices and data are from the original InvestorPlace story published on August 4, 2017. Click on ticker-symbol links in each slide for current prices and more.
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
Dividend yield: 2.44%
Cloud computing, mobile apps, big data — it doesn’t matter. All of tech runs on semiconductors. And for retirement investors, the chip makers could be some of the best tech stocks to buy. And Texas Instruments Incorporated (TXN) could be the best.
The reason is that TXN makes both boring analog chips — like the kind in your toaster — as well as more exciting fare for heads-up displays, motion controllers, touch screens, etc. So in one hand, TXN has plenty of steady cash flows from its analog business. The other is filled with higher-margined chips that provide it with amazing profit boosts.
What does that really do? Make TXN a dividend machine.
Last year, Texas Instruments raised its dividend by 32% and that mega increase marked the 13th consecutive year of dividend raises. Even better is that the firm’s payout ratio is in the 40% range. Meaning there is plenty of room for future increases as well.
With revenues continuing to rise, TXN’s current yield near 2.5% could be a lot higher for investors in the future.
30-Day SEC Yield: 3%
Expense Ratio: 0.5%, or $50 per $10,000 invested
While holding broad ETFs that focus on tech stocks, like the Technology Select Sector SPDR Fund (XLK), can net investors higher dividend yields than during the dotcom days, they aren’t anything to write home about. But the 3% 30-day SEC yield of the First Trust exchange Traded Fd VI (TDIV) is.
TDIV is the only ETF to specifically hone in on tech stock dividends. The fund tracks an index of tech stocks that have paid a regular or common dividend within the past 12 months, yield at least 0.5% and have not decreased their dividends over the last 12 months. That’s currently 88 different firms. Top holdings include Microsoft Corporation (MSFT), Apple Inc. (AAPL) and Broadcom (AVGO).
This focus on steady, dividend-paying firms within the tech sector provides TDIV with that relatively juicy 3% SEC yield.
As for TDIV’s returns, since the fund’s inception in August of 2012, it has managed to produce 12.6%. That’s slightly lower than the performance of the XLK. However, the difference in the two comes down to the inclusion of additional names like Alphabet Inc. (GOOG, GOOGL) in the SPDR. Meanwhile, TDIV’s ride has been a heck of a lot smoother.
In the end, when it comes to tech stocks for retirement investors, TDIV is the ETF to buy.
Expense Ratio 0.76%
Minimum Investment: $2,500
The Fidelity Select Software & IT Services Portfolio (FSCSX) mutual fund focuses on tech stocks that are just minting cash flows.
FSCSX is actively managed and focuses its attention on all the software and outsourcing firms located in the tech sector. Software firms typically have some of the fattest margins, as their only costs are really engineers and programmers. As a result, they have tremendous cash flows. The fund currently holds 54 different software giants, including MSFT and GOOG. And it has distributed more than $8 in capital gains distributions to shareholders in the past year.
As for returns, FSCSX has been top notch. Over the last ten years, the mutual fund has managed to return over 13% annually. That has trounced the S&P 500 and broad tech stock funds. The secret has been its focus on following the sector’s biggest cash piles.
Expenses for FSCSX run at 0.76% and the minimum for investment is $2,500.
This article is from Aaron Levitt of InvestorPlace. As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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