The dividend surprise from US tech stocks like Apple, Google and Microsoft

US tech stocks pay big dividends. Picture: Bloomberg

The world’s leading technology companies continue to stun investors with better-than-expected results. Apple, Google and Microsoft lead the field with powerful revenue and profit growth.

But what many Australian investors may have missed is that these stocks are now serious dividend payers too.

Apple is a case in point; according to technology analyst Laura Martin, “Apple should be valued as an ecosystem company owing to the seamless integration of hardware, software and content”. On the software side of the business, I think Apple iTunes can generate higher margin software-as-a-service (SaaS) earnings streams.

For most of us who use these services and products day in and day out, it is easy to forget that many US technology companies are now mature businesses with eye-watering cashflows. Apple’s net cash stood at $US72bn in the second quarter of 2021. Even with the reinvestment of capital into research and development, technology companies are able to grow dividends for their shareholders.

According to a recent report from ProShares entitled ‘‘Technology stocks: an unexpected source of dividend growth’’, the dividends paid from technology stocks in the S&P1500 Composite Index have more than quadrupled from 2011 to 2020.

The annual growth rate in dividends paid by technology companies in the S&P1500 composite index has grown at an annual compound rate of more than 15 per cent since 2011.

The next highest is financials at just a 10 per cent per annum compound rate.

There are of course reasons why 2020 was a standout year for technology and a depressed year for financials, notably the impact of lockdowns on the respective business models.

However, as the facts stand, many technology stocks are no longer the loss-making start-ups they were and differ from the many failed internet wannabes in the run-up to the dotcom bubble.

A quick number-crunching exercise carried out earlier this year shows just how impressive the returns have been for Apple and Microsoft versus Commonwealth Bank and BHP in the last five years.

During that time the Australian dollar depreciated 1.5 per cent against the US dollar, which in turn enhanced the Australian dollar-denominated returns.

A quick number-crunching exercise carried out earlier this year shows just how impressive the returns have been for Apple and Microsoft versus Commonwealth Bank and BHP in the last five years. Picture: AFP

Put simply, the five-year total returns from Apple and Microsoft (at 531 per cent and 467 per cent respectively) stand at multiples of the total return we have managed at our leading stocks: BHP over the same period is 229 per cent and CBA is 67.9 per cent.

Although much has changed since the start of the pandemic, the one notable change is how technology companies have risen to the challenge.

The work-from-home hybrid models and ongoing lockdowns just lay bare how reliant the world has become on the digital economy and e-commerce.

That, in turn, promotes the ongoing growth in software and cloud-based services and infrastructure, which in turn creates another flywheel in the demand for and development of enhanced cybersecurity software.

On top of all of the e-commerce, digitalisation and information businesses is the global race to decarbonise the energy sources that power many of these businesses.

The technology giants have a finger in most and in some instances all of these pies, and the pies are growing, not shrinking.

These are secular mega-growth themes, and technology and innovation lie at the heart of this change.

In 2020, our borders may have closed physically but the internet and our digital connectedness have melted borders and shrunk the world at the same time.

Previous research from Morgan Stanley into the top 25 per cent performers of the S&P 500 from 1990 to 2009 showed that the highest source of total shareholder return, and the key driver of long-term stock performance, is revenue growth. If that’s the case, then the US technology stocks, which are strategically positioned to capitalise on the secular growth trends of the next decade, have the potential to continue to deliver outstanding stockholder returns.

Although we may be located in the land down under, our share portfolios, because of lower trading costs, have potential to share in the growth and income generation of US stocks.

As usual, you will need to seek some advice regarding the tax treatment of dividends for your personal circumstances, but Australia has a favourable tax treaty with the US.

Making enhanced returns and money from technology stocks is now just a click away.

Danielle Ecuyer is the author of Shareplicity 2 – A guide to investing in US stock markets (Major Street Publishing 2021).