Will High-Tech Ever Grow Up?

Tech companies pay dividends like mature, stable companies but are still teenagers at heart.

Tech companies pay dividends like mature, stable companies but are still teenagers at heart

• Intel's revenue and profit declined sharply on falling PC sales. The company has been investing in mobile phone and network security, but its stock has been stagnant for a decade. Intel has long embraced dividends, though, and its dividend yield is currently 3.9 percent.

• Facebook turned in the biggest surprise with a stunning 53 percent surge in earnings for the quarter, partly because it managed to turn mobile advertising into a big source of revenue. Shares leaped 17 percent after the report, demonstrating how quickly the fortunes of tech stocks can change. A year ago, Facebook's failure to anticipate the rapid growth of mobile spoiled its initial public offering, a critical misstep that caused its shares to plunge. With this week's gain, it's within $8 of its $38 IPO price.

Broadly, the sector's disappointing results reflect intense competitive pressures. But the high cash levels many firms hold are creating pressure to pay out dividends anyway. One of the biggest tech names, Dell Computer, frustrated over its lagging share price, has been attempting to use that cash to take the company private.

Shareholder activists have been pushing the companies, including Dell, to share their riches. Carl Icahn has been actively trolling in high-tech, and not just the sector's aging giants, like Dell. He is also a major investor in high-jumper Netflix. Even Apple, as big as it is, was not too big to discourage corporate raiding. David Einhorn took a large stake in the company and pushed for action to boost its share price.

[See: Meet the New White Hat Activists: Not Just Corporate Raiders Anymore.]

Fulton says the best strategy for investors looking for more stable returns in the tech sector is to avoid companies like Apple, whose growth prospects depend on short product cycles. She says companies like Qualcomm and Xilinx generate much of their revenue from licensing, not products, so they have steadier income streams. Both pay dividends as well. She says if investors decide to buy tech stocks, they should be prepared to ride out volatile product cycles.

"I would not buy a tech stock that does not pay a dividend," Fulton says. Those payouts reflect a commitment to steady, reliable earnings. Tech mutual funds with a track record of making solid picks may be a smoother way for investors to dabble in the sector, Kessler says.

Size matters, too. For bigger companies like Apple, recurring revenue that really affects the bottom line is hard to find. IBM has done a much better job of transforming itself into a tech company with recurring revenue business, Fulton adds.

"A lot of tech companies are becoming more mature," Kessler says. "But growth is getting harder to come by. Investments carry a lot of risk. That's the impetus for the dividend increases. The market is starting to respond favorably. Investors, especially baby boomers who want income, are looking for that, and the companies are responding."