The evolving landscape of technology stocks and dividends
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Article Type
Market Updates
Topic
Macro
Published
January 13, 2025
Read time
4 mins
Author
Jane Hepburne Scott
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Technology stocks are not typically thought of as being obvious income candidates. Traditionally, tech companies have prioritised reinvesting profits back into their operations, rather than returning capital to shareholders. However, there has been a significant shift over the past decade, as a growing number of established technology companies have begun to pay a dividend. In 2023, 39% of all tech stocks within the S&P Composite 1500 paid a dividend, a significant rise from just 28% in 2013. The trend continued into 2024, with major players including Alphabet and Meta initiating dividends, as they signalled confidence in their massive free cash flow generation capabilities, and their commitment to capital discipline and expense management. 

 

Moreover, the growth rate of dividends from technology stocks has outpaced that of the broader market for several years, fuelled by their central role in numerous megatrends, including AI. Consistent dividend growth is a strong indicator of the sustainability of earnings, and so this has made the sector more popular amongst investors seeking both capital appreciation and a reliable income stream. 

 

Aegon Global Equity Income Fund: A unique approach

 

The Aegon Global Equity Income Fund invests in quality companies, with attractive growth prospects, strong balance sheets, good margins, high returns on equity and low levels of debt. Our strategy seeks a 'sweet spot', where companies invest in their business to drive strong earnings growth, and this in turn flows through to dividend payments and to dividend growth. 

 

A key differentiator for our fund - and a source of outperformance - is that because dividend yield is managed at the portfolio level, we have been able to allocate a higher percentage of our investments into technology stocks, compared to traditional income funds which typically favour lower growth but higher-yielding sectors such as energy, telecommunications and utilities. 

 

Capitalizing on AI growth opportunities 

 

The Fund is strategically positioned to capitalize on growth opportunities arising from artificial intelligence (AI) through various stock selections. We hold several semiconductor companies—including Broadcom, TSMC and Tokyo Electron — that are integral to the design and manufacturing of AI chips for example.

 

In addition, one of our largest holdings is Microsoft, one of the "Magnificent Seven" tech giants. Microsoft’s financial success is driven by its cloud computing segment (which is benefitting as its' customers transition their data and operations to the cloud) and the integration of AI into its software offerings. Microsoft is one of the biggest dividend payers on the planet, and over the past six years its dividend has compounded at an impressive rate of 10% per annum. The company paid out almost $22 billion in dividends in its most recent financial year and recently announced a new $60 billion share buyback authorisation. Taken together, this constitutes as staggering amount of cash being returned to shareholders.


 
The impact of AI will be wide-ranging and our fund also has exposure to less obvious beneficiaries, such as Accenture. Accenture, a recent addition to the fund, is the world’s largest IT consultancy and outsourcing firm. We believe Accenture is well-positioned to benefit from a resurgence in IT projects, which have been subdued since the explosion of activity around the COVID-19 pandemic. And in the long term, as enterprises develop their AI strategies, they will increasingly rely on Accenture's expertise and guidance. Accenture exemplifies what we would term a ‘compounder’, with strong top-line growth potential, solid profit margins, robust free cash flow generation, and a proven ability to return cash to shareholders. Its capacity to attract top talent further enhances its competitive edge. Notably, Accenture has increased its dividends at an impressive rate of 12% per annum over the past decade and has now increased its dividend for 19 consecutive years. 

 


All stocks named above are held in the Aegon Global Equity Income Fund as at December 16, 2024.

 

 

Disclosures

Author

Jane Hepburne Scott
Investment Analyst

Jane Hepburne Scott, investment analyst, is a member of the global Equities team responsible for contributing investment ideas to several strategies including Global Sustainability, Global Equity Income, Technology, North America Select and US Sustainable Income strategies. 

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