So far, 2017 has been a pretty good year for the stock market. The Standard & Poor’s 500 Index is up more than 10 percent and the Dow Jones industrial average just set a new all-time high above 22,000.
But while the stock market in general is doing well, technology in particular is simply knocking it out of the park this year.
Two of the largest tech funds out there, the iShares U.S. Technology exchange-traded fund (ticker: IYW) and the Technology Select Sector SPDR ETF ( XLK), are both up about 20 percent so far this year to roughly double the returns of the broader market. And some individual names are up even more — such as Netflix ( NFLX) that has jumped over 40 percent and Tesla ( TSLA) which has soared over 60 percent since Jan. 1.
The biggest driver of tech stocks lately has been a one-two punch of earnings growth attracting investors now, and innovation that has Wall Street optimistic about the future, says David Fabian, managing partner and chief operations officer of FMD Capital Management in Irvine, California.
[See: 20 Awesome Dividend Stocks for Guaranteed Income.]
Tech stocks “continue to roll out new products, new services, new revenue streams and customers are eating it up,” he says. “You just don’t find that level of consistent growth in any other sector.”
But while popular and high-flying companies like Tesla and Netflix get a lot of attention, the opportunity many investors are overlooking now is one of long-term outperformance and stability in technology stocks.
Surprising values and dividend potential. Many investors have been enamored with big names lately — Facebook ( FB), Apple ( AAPL), Amazon.com ( AMZN), Netflix ( NFLX) and Google parent Alphabet ( GOOG, GOOGL). But “tech is a broad category” and the timing may be right to look beyond these fashionable names of the moment and think long-term, said Eddy Elfenbein, portfolio manager of the AdvisorShares Focused Equity ETF ( CWS).
Elfenbein points to Microsoft Corp. ( MSFT), a sleepier tech name that is currently a holding in his fund because of great management under CEO Satya Nadella, who has orchestrated “an impressive turnaround” from the Steve Ballmer era a few years back.
It may not be as dynamic as a Netflix or Tesla, but Microsoft yields just shy of 2.2 percent in dividends annually, and just authorized an additional $40 billion stock buyback plan last year. With reliable cash flows to support those efforts, investors can really see this tech stock as a bedrock holding with staying power.
Eric Ervin, CEO of Reality Shares, says large-cap tech stocks hold promise for long-term investors. Reality Shares is an ETF issuer and research firm focused exclusively on dividend growth investing, and Ervin and his firm see names like Microsoft as prime examples of the income potential provided in large tech companies.
A few stocks Ervin recommends include Activision Blizzard ( ATVI), Texas Instruments ( TXN) and Nvidia Corp. ( NVDA) thanks to “strong fundamentals, double-digit dividend growth expectations and healthy outlooks for future earnings and cash flow growth.”
[See: The 10 Best Dividend Stocks of 2016.]
What’s next for tech? The outlook for tech could get even brighter if Congress passes tax reforms that include some kind of holiday on overseas cash, Ervin says.
“As of Aug. 3, S&P 500 companies have stashed more than $1 trillion of cash overseas,” he says, and “70 percent of this cash hoard belongs to tech stocks.”
That means investors in companies like Microsoft, with over $100 billion stashed overseas, would likely benefit most from a repatriation tax plan as a big chunk of that cash gets delivered directly back into their pockets via dividends.
That could prompt a big move for a group of large-cap stocks that otherwise have been getting less attention than the more agile names in tech.
But it’s not unrealistic for tech to fall out of favor after a pretty long run for the sector. Elfenbein warns that it’s dangerous to assume every name in the sector has certain growth ahead of it and investors have to do their homework.
“We’re in the ninth year of a bull market, so many of the previous strategies have been played,” he says. “That leads to a premium being placed on growth.
Conversely, this is a punishing environment for companies that miss those growth expectations. He points to International Business Machines Corp. ( IBM) and Qualcomm ( QCOM) as examples of tech stocks that yield more than 4 percent but have actually declined year-to-date because of sluggish growth outlooks.
Of course, any short-term woes may not matter much to patient, dividend-focused investors who can think beyond month-to-month volatility, Fabian says.
The mega-sized but slower-growth names in tech may “lack the same excitement factor as social media or services companies,” Fabian says, but they also serve very different purposes in a portfolio than a fast-moving momentum stock.
[See: 7 Horrendous Dividend Stocks to Actively Avoid.]
Companies like Qualcomm or “are still very solid businesses that have now transitioned to more of a value model that includes returning capital to shareholders through dividends and focusing on their core products,” Fabian says. “Not everyone can be flashy, but some stocks are just good substance to own.”
More from U.S. News
7 of the Worst Stocks to Buy for 2017
7 of the Best Health Care Stocks to Buy for 2017
The Top 10 Investment Portfolio for Millennials
Look to Tech Stocks for Big Dividends originally appeared on usnews.com
