Cashing in on the strength of US tech

Over a decade ago the notion of investing in technology for anything but capital growth would have been scoffed at. With fund names such as Gartmore TechTornado, investors knew they were opting for a high-risk proposition but with the potential for high rewards.

Sadly for the majority of the retail investing community, while the former proved true, the latter was not, as the TMT bubble of 2001 left an indelible mark on the sector as returns were wiped out.

The following decade saw the number of tech funds to choose from dwindle as investors shied away from the sector through fear of being burnt again.

Fast forward to today, and the picture could not be more different. Last week, Apple, the success story of the past several years, announced it was to pay its first dividend since 1995.

Apple joins the ranks of Cisco, which last year paid a dividend for the first time, while 2011 also saw Microsoft raise its dividend by 25%. Elsewhere, Intel pays a dividend yield of over 2.9%, with tech companies generating free cashflows to burn. Apple’s expected dividend yield is 1.8%.

It seems a long way away from the scary, risk-averse image of tech companies that many investors have in their minds and shows just how much the sector has matured since the dark days of 2001. (Comment continues below)

Indeed, it is testimony to the strength of these businesses – and, just to be clear, for these purposes we are solely discussing American tech – that the financial crisis of 2008 threatened the existence of very few of them.

Yet that is not to say these companies no longer have growth prospects. Paying a dividend is not always indicative of going ex-growth, and of course, risks always remain when it comes to technology.

One of the biggest risks concerns the patent wars at present taking place, with about 18,000 patents required to build one smartphone.

”There is growing evidence that managers on this side of the Atlantic are using tech as an income source”

This could be a huge bar to innovation and is something that American regulators are monitoring.

Following last week’s Apple announcement, CLSA Asia Pacific markets (see news, page 10) expects about $25 billion (£16 billion) of incremental demand for Apple shares from American income mutual funds as they start building positions in the stock, which was last week also named the globe’s leading brand.

There is also growing evidence that managers on this side of the Atlantic are using tech as an income source. Several global income funds have positions in Apple, while the new Legg Mason US Equity Income fund is also overweight in the sector.

So American tech as an income play? Who would have thought it?