If you want to know how to invest in tech in 2013, there's a major shift you should understand.
For much of the past three decades, technology companies have been huge sources of share-price growth. Some of the world's biggest tech companies have let growth stock investors latch on to their innovation potential and watch the share prices soar above other sectors.
These tech stocks have been a great growth story for decades, and their industry dominance has led to huge profits and cash piles.
But, the growth leaders have changed.
The tech giants of the past are in a new position right now, with lots of buying power – but few reinvestment opportunities.
"What happens, you see, is that highly profitable companies over time can amass big blocks of cash. For high-growth-seeking investors, however, that's often a cautionary signal," explained Money Morning tech expert Michael Robinson. "Chances are, those companies have either run out of ideas on how to use that cash to generate continued growth. Or their business has slowed so much that there's just no place to profitably redeploy that cash."
With their enormous cash balances and annual cash flow generation, it instead looks like these former industry leaders will shift to dividend sources for the next two decades.
That means the best ways for how to invest in tech in 2013 have changed.
How to Invest in 2013: Tech Becomes a Major Dividend Source
According to a recent report from Moody's Investors Service, tech stocks are now the leading dividend payers in the Standard & Poor's 500 Index. Technology companies are expected to pay over $44 billion in dividends to shareholders this year, up 35% from last year.
Tech's dividend payouts got a huge boost in April when Apple Inc. (Nasdaq: AAPL) raised its payout by 15%.
The technology and consumer products company is now the largest dividend payer in the world and is expected to pay out a little more than $11 billion in cash this year.
Apple has transitioned from a flashy growth stock. It has now started its income and dividend growth chapter. After the dividend increase the stock now yields close to 3% and has a higher yield than 10-year Treasuries, and almost as much as the 30-year government bond.
Apple has almost $140 billion in cash and generates more than $30 billion of free cash flow that it is now used to reward shareholders. It is widely expected that the company will continue to increase the dividend payout to shareholders with total yield close to doubling over the next three to five years.
Apple isn't the only big name tech stock in transition. Cisco Systems Inc. (Nasdaq: CSCO) dominates the networking market and provides much of the equipment that powers the modern Internet. Cisco's routers, switches and software are the industry standard and it retains a huge market share for these products.
Along the way to dominance the company has compiled a cash balance of more than $40 billion and is generating additional cash flow every year of around $10 billion.
The stock current yields 3.3%. The company started paying a dividend in 2011 and as the cash continued to pile up they have raised it from just 4 cents a share per quarter to the current level of 17 cents quarterly.
At the current rate they are paying out just 25% or so of annual profits, so there's plenty of room to increase its dividend. Some analysts project that Cisco's payout could increase by more than 25% annually. At that rate the dividend yield will double in less than three years.
Another big tech name has raised its dividend: Microsoft Corp. (Nasdaq: MSFT). The world's largest software company has piled up profits over the past few years and now has a staggering $70 billion of cash available.
Even after the sharp move this year – up more than 22% year-to-date – the stock yields 2.90%. The company initiated a dividend back in 2003 and the payout has risen by a factor of 10 since that time. The company is expected to continue to be generous in increasing dividends going forward with the dividend growth rate expected to exceed 15%. That should cause the payout to more than double over the next five years.
How to Invest in Tech: Dividends vs Growth
For investors who like familiar names with increasing dividends, tech has a lot to offer.
But for investors who are on the hunt for the next Apple or Microsoft, who want to profit from future growth, it's time to explore companies that have pipelines full of high-demand products – and cash to spend on acquisitions and more research & development.
Money Morning tech specialist Michael Robinson has been tracking these new tech leaders in his technology research and investment reports. He details these latest finds in his free tech investing newsletter – just go here for more info.