Tech Growth? Believe Me, I’m Looking

“Try adding some tech growth to your portfolio.”

That was a suggestion I received last week. The reality is that “tech growth” is pretty much a double negative for dividend investors.

When a company has earnings, it can really only do three things with it:

• Save it as cash for a rainy day

• Invest it back into the business

• Share it with the business owners, aka shareholders

By design, a company in its growth phase shouldn’t be paying much or any dividend. It should be reinvesting its available cash back into the business. This is true no matter what sector the company operates in.

Growth = Reinvest earnings

Tech companies, no matter how mature, should also be heavily reinvesting into their business. This is the only way to stay ahead of their competitors.

Unfortunately, if earnings are needed for reinvestment, they cannot be paid to shareholders as dividends. For us dividend investors, there is the added headwind that growth stocks tend to trade at a premium valuation. That makes the yield even smaller!

So, in most cases when you see a tech growth company with a decent dividend, it’s actually a red flag. You might be able to collect that dividend for a short period of time, but the odds are it’s going to end up getting cut.

A Cautionary Tale

Intel Corp. (INTC) is a great example of how this tradeoff works.

The semiconductor giant paid a quarterly dividend for 32 consecutive years. Then in 2023, management slashed the dividend from $0.365 to $0.125. Just over a year later the dividend was suspended completely.

So, what happened?

Intel had underinvested in its manufacturing process for years. This allowed Taiwan Semiconductor (TSMC) and Advanced Micro Devices (AMD) to leapfrog right over them technologically. The performance of AMD’s Ryzen and EPYC chips edged ahead of Intel’s in both the consumer and data center markets.

The loss of leadership in the chip market caused Intel’s revenues to collapse.

Intel responded in 2021 with its IDM 2.0 strategy to rebuild its foundry business. It required tens of billions of dollars that simply couldn’t be funded while also paying a dividend.

At the end of the day, there would have been no need to rebuild its business had it kept up with reinvestments in the first place.

When The Opportunity Is There, We’ll Take It

If you look at mainstream lists of tech growth stocks, you’ll be hard pressed to find a dividend yield over 1%. 

Broadcom (AVGO) is one of the standout dividend payers in tech growth. It has raised its dividend for 15 consecutive years, but its yield is just 0.7%.

Nvidia (NVDA) just increased its quarterly dividend from $0.01 to $0.25, but that’s still just 0.4%.

Most companies are like Palantir (PLTR) which doesn’t pay a dividend and ploughs everything back into growth.

However, I’m always on the hunt for technology opportunities wherever I can find them.

Back in 2023, my Essential Income readers grabbed shares of International Business Machines (IBM) when they yielded over 5%. We scored a quick gain of 42% in just 11 months.

In 2024, we picked up exchange traded 8.375% senior notes issued by Synchronoss Technologies. The company provides white label cloud storage solutions to telecom companies. The notes were redeemed early and we snagged an 18.2% gain in less than a year.

Then in March of this year, Essential Income readers got into OneSpan Inc. (OSPN). The company is a leader in digital identity and anti-fraud solutions for banking, financial services, and healthcare companies. Shares had been unfairly beaten down after earnings were revised lower and the broader sell-off in software companies.

We got in at $10.63 for a great yield of 4.89%. This is a shorter-term position in our Opportunity Portfolio. We’ll keep collecting our dividends as the company’s transitional period unfolds, which is already playing out. In less than three months, shares are up 33.9%, dropping today’s yield to just 3.7%.

If you want to add tech dividends to your portfolio, you have to get a little creative. Check for preferred shares or exchange traded senior notes that have fixed payments. And always watch for shares being unfairly punished by investor fears that will surely pass.

I may not talk about the tech sector very often, but I regularly monitor it for opportunities when they pop up.

For more income, now and in the future,

Kelly Green