Technology Sector: Expertise, Size And Reputation Are Its Best Assets

We would separate tech stocks into two different categories:

#1 Companies with disruptive technology entering various fields such as retail (Amazon), Television (Netflix), Financials (Robinhood) or accommodation (Airbnb). Those companies are fighting for market share and they are rapidly growing. They are not interested in paying dividends.

#2 Companies that were once growing rapidly through technology breakthroughs but have now grown-up. These are “adult” tech stocks that are well established in their respective markets. Since it’s in their DNA to develop new technology, they are still manifesting several growth vectors.

At Dividend Stocks Rock, we are interested in the latter. Older tech stocks have developed new markets that are relatively mature now. We can think of Microsoft and Intel that were at the very beginning of the PC era. Now that consumers are shifting toward smartphones and tablets, PC sales are slowing down. However, both companies still enjoy strong cash flow generation from their PC related activities. At the same time, they have also developed other technology (cloud, big data, data center, etc.) that enables them to post high-single digit to double-digit revenue growth.

Sub-Sectors (Industries)

Greatest Strengths

If you want to find dividend payers among tech stocks, your best bet is in the semiconductor industry. This is where you will find companies like Broadcom (AVGO), Intel (INTC), Texas Instruments (TXN), Qualcomm (QCOM), Analog Device (ADI) and Taiwan Semiconductor (TSM). They are all “old” techs that have gone through several technology cycles and found ways to get bigger and stronger. Today, they are all showing great perspectives. Their expertise, size and reputation are their best assets.

Another industry that is on the rise in Canada is software or often called SaaS (software as a service). SaaS businesses are built around my favorite concept: recurring revenues. You will find companies like Sylogist (SYZ.V), Absolute Software (ABST.TO), Open Text (OTEX.TO), Enghouse (ENGH) and Tecsys (TCS.TO). Those companies will usually use their exceptional cash flow generation capabilities to acquire smaller firms to increase their market share. Their yield is minimal (besides Sylogist), but their dividend growth and capital growth are phenomenal.

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