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By Josh Peters, CFA | 05-20-2015 04:00 PM

Dividend Investors: Time to Rethink Tech Stocks?

Although companies such as IBM and Apple have been increasing return to shareholders, the long-term resilience of these businesses remains uncertain, says Morningstar's Josh Peters.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm here today with Josh Peters--he is the editor of Morningstar DividendInvestor newsletter and also our director of equity-income strategy. We're going to look at tech stocks and how dividend investors should think about them.

Josh, thanks for joining me.

Josh Peters: Good to be here, Jeremy.

Glaser: So, let's start with talking about the tech sector as a whole. It's not one that's known traditionally for paying generous dividends. Do you think dividend investors should even bother taking a closer look at tech names?

Peters: I think it's always a good idea to have an open mind. And certainly for your traditional income-oriented investor who is probably going to have a lot of staples stocks, a lot of utilities, a lot of REITs, it's nice to have that option for diversification to get into some other sectors of the economy. But what you have in those traditional dividend-paying areas of the market that you don't necessarily have in tech is a long-run stable state of reliability, whereas in technology, business models are going to have to change faster--and maybe or maybe not successfully--in ways that General Mills (GIS) just doesn't face. I'm pretty sure that Cheerios are going to be the same 50 years from now as they were 50 years ago as they are today. You can't really say that about tech companies.

Glaser: So, do you think that it's OK to just ignore a whole sector or does that kind of throw off your portfolio?

Peters: Well, some people--especially institutional investors or people who are being measured closely against benchmarks in the matter of a year or even three months at a time--if the tech sector takes off and you have no exposure to it, then you're probably going to be left behind. But I prefer to think of it in terms of what kinds of income characteristics do these companies have, are they meeting my income objectives--both above-average yields, which tech stocks still as a whole do not offer, as well as income growth. We've seen a lot more dividend increases in tech over the last couple years; but still, the yield of the sector overall is about 1.5%--well below the market average as well as my usual minimum of 3%.

So, if you can't get what you're looking for from a dividend perspective from these companies, I don't think it's essential to own them. The way I like to look at them is this: Most of them, despite having very high profit margins in a lot of cases or gigantic hordes of cash, are cyclicals. So, I'm not sure that I would look at an Intel (INTC) or a Microsoft (MSFT) that much differently than I would look at a General Electric (GE) or in Emerson Electric (EMR) or UPS (UPS).

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