Yesterday, I asked my readers a question:I made the argument that the company should invest in new products and do whatever it can to expand its business (including acquire other companies) and solidify itself as an even more important company in the industry.
But after reading through the comments, it became abundantly clear that some readers thought I should have included a payout back to investors in the form of dividends. After seeing that, I decided a follow-up column on that topic was in order to fully explain why many companies in the technology industry are loath to offer dividends to investors.
Sure, technology stocks may be a great place for investors to diversify their portfolios or maybe even get rich with the help of stocks like Apple and Google that keep performing extremely well. But for those that are looking for steady income from their shares in the form of dividends, the technology sector is a bad place to start.
The reason why is quite simple: most of the companies in the tech sector are obsessed with growth and need to manage huge research and development budgets. And because few competitors boast residual dividend policies, few companies feel the need to fork over cash to investors for their support.
And unfortunately, there's no sign of that trend changing.
Why should companies offer dividends? The answer to such a question isn't as easy as some may think. Yes, it can be an indicator of a company's strong performance, but it can also act as a tool to coax more investors and raise capital for a firm that isn't performing as well as it should.
Generally speaking, a company with a dividend policy in place needs to maintain a certain payout each quarter. If it fails to do so and abandons dividends or reduces payouts, the company puts itself at risk of losing investors in the short-term. Most investors see such a move as an indicator that something has gone wrong in the company and typically pull their money out before it gets worse.
On the other hand, some companies decide to forgo the use of dividends to attract investors and rely on their success to coax them to their side. That strategy works with a company like Apple, but Microsoft, a company that performs extremely well, but hasn't been able to grow at a significant rate over the past decade, has been forced to issue quarterly dividends as it continues to witness its stock price stay relatively static.
For Microsoft, the risk of issuing dividends and maintaining them over the long haul isn't as worrisome as it could be for other companies in the industry that are more impacted by the ebbs and flows in the sector.
"Apple does not currently pay dividends on its common stock," the company wrote on its Investor Relations page. "Apple paid dividends from June 15, 1987 to December 15, 1995."
In just two short sentences, Apple outlines its strategy and that of many other companies in the industry. Look no further than a company's dividend policy to see where its priorities are and what it believes is best for its business. In Apple's case, it's ostensibly concerned that it's subject to a fickle consumer base that expects a certain level of product quality from the company. Because of that, it will need to use its $24.5 billion to invest in research and development, try to constantly stay ahead of competition, and keep some cash on-hand in case times get tough.
But Apple isn't unique in its position to forgo dividends. Google and Yahoo have never paid dividends, nor has Dell. eBay has failed to ever pay dividends, while the world's leading computer manufacturer, HP, maintains a steady $0.08 per share quarterly dividend. For its part, Microsoft has paid quarterly dividends of $0.11 per share for the past year.
Now, it should be noted that there are a slew of companies in the technology sector that do pay dividends and HP and Microsoft are not alone. But when compared to other sectors in the economy, technology usually lags behind others in dividend payout.
The reasons for that are numerous, but they can generally be simplified into one premise: the technology sector is dominated by companies that are operating in hotly-contested areas and investing in growth and the future are of paramount concern to most executives.
And it's for that reason that the tech sector simply doesn't like to give money back to its investors. Sure, Apple may have been extremely successful during the last quarter, but Jobs and Company have big ideas about the future of their organization and giving money back to those who tie their retirements to them isn't part of that plan.
If you're looking for solid dividends, look in the financial sector. But if you're looking for companies with a solid focus on growth and no real allegiance to dividends, the tech sector might be for you.