The Case For Information Technology Dividend Growers

One of the common misconceptions in finance is that companies from the Information Technology (Tech) sector do not pay dividends. While this may have been the trend a long time ago, this has certainly not been the trend over the past 10 years. Over the past 10 years, within the Tech sector of the S&P 500®, 26 companies initiated dividend payments and 59 companies increased their dividends at various points throughout those years, for a total of 376 dividend increases in the sector.

During the same period, with an increasing number of Tech companies paying dividends, the contribution to S&P 500 total return by these companies rose from 9.07% in 2009 to 16.33% in 2019 (see Exhibit 1).

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With the changing characteristics of the Tech sector, there is a need to measure the performance of dividend growers in this sector. Responding to market needs, S&P Dow Jones Indices recently launched the S&P Technology Dividend Aristocrats® Index, which seeks to track the performance of Tech companies that have a history of consistently increasing dividends.

Exhibit 2 shows the potential benefit of focusing on these companies: the S&P Technology Dividend Aristocrats Index provided similar risk-adjusted returns to the companies from the S&P TMI that are classified in the Tech sector over three- and five-year horizons, with lower volatility and higher dividend yield. The risk/return profile also compared favorably to the widely followed S&P 500 Dividend Aristocrats Index.

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Given the results in Exhibit 2, it is perhaps unsurprising that the S&P Technology Dividend Aristocrats Index experienced lower volatility and lower drawdowns during a recent period of market turbulence. For example, the maximum drawdown for the S&P Technology Dividend Aristocrats Index (-19.5%) during Q4 2018 was less than that for the S&P TMI Information Technology (-23.6%). Exhibit 3 provides us with a more detailed view of the daily drawdown for this period.

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