The tech sector was the largest payer of dividends in the S&P 500 last year, contributing about 17 per cent of its overall income versus 15 per cent for health care, 14 per cent for financials and 11 per cent for consumer staples.TIMOTHY A. CLARY/AFP/Getty Images
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The MSCI World Index is weighted heavily to the U.S. and big tech, and the same often applies to global equity funds whose managers are reluctant to stray too far from the market leaders.
For global income funds, that presents a particular dilemma: fund managers have to decide whether to forgo higher dividends elsewhere and instead back low-yielding, but usually strongly performing, U.S. and tech shares.
That explains, in part, why some of these funds tend not to offer the kind of yields that income investors might expect.
But is that dilemma getting less urgent? A note by research group CFRA Research suggests it might be. Todd Rosenbluth, CFRA’s head of ETF and mutual fund research, says that while the S&P 500 information technology sector had a yield of just 0.78 per cent at the end of last year, dividend growth was afoot.
“Not only did 44 of the sector’s 76 constituents pay a dividend, but nearly all either raised their dividend or initiated one in 2021, according to S&P Dow Jones Indices,” he says.
That has had a notable effect already: the tech sector was the largest payer of dividends in the S&P 500 last year, contributing about 17 per cent of its overall income versus 15 per cent for health care, 14 per cent for financials, and 11 per cent for consumer staples.
This recent trend has not necessarily been captured by some rule-based funds. Mr. Rosenbluth says that tech was often underrepresented in exchange-traded funds (ETFs) with a focus on stocks that have a long record of dividend growth, for example. Take SPDR S&P Global Dividend Aristocrats Ucits ETF and its U.S. equivalent, SPDR S&P US Dividend Aristocrats Ucits ETF, both of which had just over 3 per cent of their assets in the information technology sector on Feb 11.
Inevitably, higher-yielding global income funds have also been pretty light on these areas. Fidelity Global Enhanced Income, which had a trailing yield of 4.6 per cent at the end of January and writes options to boost its income, had 12.7 per cent of its assets in the tech sector compared with the MSCI World Index’s 22.9 per cent. It doesn’t hold big tech names such as Microsoft Corp. MSFT-Q and is notably light on U.S. exposure in general.
Murray International Trust PLC, another high yielder, counted none of the U.S. tech giants among its 20 biggest positions at the end of 2021. Bruce Stout, manager of the trust, is known for looking beyond the U.S. and focusing instead on high-quality stocks in “cheaper” regions such as Asia.
Across the sector as a whole, however, the picture is fairly mixed: some funds and trusts stay roughly in line with MSCI World Index’s tech and U.S. weightings while others deviate.
Given that the other major U.S. tech companies don’t pay dividends, it’s not surprising that Microsoft and Apple Inc. AAPL-Q are the most recognizable tech names that do appear, sometimes prominently, in global income portfolios. Aegon Global Equity Income Fund’s 8.3 per cent position in Microsoft at the end of November is one extreme example.
That perhaps makes sense given the company’s record: CFRA Research notes that Microsoft kicked off its dividend history with a payout of US$0.32 a share in 2004. That has since risen to US$2.24 a share at the end of the 2021 fiscal year, a level that has been increased again since. For many holders, consistent dividend growth is as important as the overall level of income paid out.
Should the tech dividend increases continue to roll in, there could be more global income managers both diving into the sector and backing names other than these two. If tech can retain its poise, managers will be having their cake and eating it.
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