Snapchat, don’t follow the trend but look at dividends

The IT sector is interesting because technology continues to go beyond expectations. The tech sector have been doing phenomenally well, markedly outperforming the broad equity market.

Technology, when it reaches its maturity, becomes a great sector to own in any dividend strategy. Technology is also operating in a very regulated environment so there are opportunities for tech companies to grow. Technology, alongside new economy stocks, is able to give you both yields and growth. Being able to catch that is really important and enable to capture trends early on. It is important to capture technology stocks that have started to pay dividends recently (e.g. Apple, one of the largest US dividend payer) and allow investors to be abreast of the trends early on. That is key and it does mean that you need to be flexible in your screening and selection of the stocks. If you are flexible you can catch these trend early and allow the investors to obtain performance along the way as well. Technology continues to develop and grow and to outperforming all other sectors essentially since post financial crisis.

A dividend approach: WisdomTree’s view
New IPOs such as Snapchat suggest that the life cycle of technology is quite short and, unless you continue to innovate, you may actually in the end fail. Because of that you see that when we talk about mature technology stocks, such as Google, Facebook, in order for these to stay relevant, they continue to invest and diversify. The reason why technology is interesting is that it provides growth and, in a mature state, dividends. From this point of view, using a dividends weighted approach in investment decisions makes it possible to generate higher returns, often with lower volatility, compared to traditional cap-weighted approaches. When compared to traditional cap-weighted approaches, WisdomTree found it was potentially possible to generate higher returns with lower volatility by investing in only dividend-paying stocks and weighting them once a year based on the dollar value of the dividends the companies pay, rather than their market value. We weighted ETFs by dividends also because we believe these fundamentals offer a more objective measure of a company’s health, value and profitability than stock price alone. For our dividend ETFs, we use proprietary weighting methodologies designed to magnify the effect fundamentals—such as dividends – have on risk and return characteristics. (For our dividend ETFs, we use proprietary weighting methodologies designed to magnify the effect fundamentals—such as dividends have on risk and return characteristics.) Higher profitable stocks such as Google and Alphabet now should be on the radar list for investors looking to build their portfolio with stocks that are going to pay dividends.

The Apple case and Trump
The Apple case is interesting, but there are more interesting stocks, such as Google’s Alphabet. You could foresee Google to become the next dividends payer. Apple is more an established player, they do iPhones, they do notebooks and everything. Google, Facebook, they are high profits companies, you need to have profits to pay dividends. However you need to be careful, once a company issues a cash dividend, it’s important to look at its capability to issue a cash dividend on a regular basis, year after year. It’s a signal to investors, “we are looking to distribute income for the longer term”. Stabilize the client base means to stabilize the equity base. About the taxation issue, it becomes pretty convenient for many tech companies to register themselves in tax heavens to avoid to pay tax. However, also if they pay taxes, they are profitable, their destiny to pay dividend is almost a given. I think if Trump is going to lower corporations tax it remains to be seen whether the money is going to be invested in business or used to pay a special dividend. In both cases I think that the outlook for the stock price is bullish.

Viktor Nossek – Director of Research – WisdomTree in Europe