Part of the allure of dividend paying stocks is that they pay back your initial investment directly. Ten years after the tech bubble, many tech stocks now offer attractive dividend payments. Has the tech sector become attractive to income investors who wish to be paid back without having to sell their shares in the secondary market?
Calculating Payback Periods
The number of years it takes for an investment to pay you back is called the payback period. It is a simple and crude measure of risk. Other investment metrics like required return do not always match up to the calculated payback period. This is because required return takes into account how dividend distributions in earlier years are worth more than the same dollar value paid out later in the future. (You would be able to reinvest the earlier distribution and earn a return on it, making it worth more.)
Payback period estimates depend on earnings growth and dividend payout ratios. Payout ratios were assumed constant, and dividend was projected by taking the minimum of the following:
- Earnings growth over the past five years
- Analyst estimates for earnings growth for the next five years
- Return on equity times the earnings reinvestment rate
The minimum of these measures was then used to estimate dividend growth for the next three years.
Tech stocks were screened for dividend payback within two decades, dividend yields in excess of the 10-year treasury yield and payout ratios below 60%. The values of these inputs are provided below:
EPS Growth Past 5 Years
EPS Growth Next 5 Years
Logitech International SA
Abnormal growth will not last forever, and analyst estimates, as informed as they are, are not predictive indefinitely. To address this limitation, a terminal 3% dividend growth rate was applied for every stock in the list after three years of projected growth rates. (Predicting economic growth many years out is impossible, and 3% seemed like a reasonable value.)
There are more tech sector stocks than utilities stocks with payback periods inside of two decades:
Semiconductor - Broad Line
Semiconductor Equipment & Materials
Security Software & Services
Healthcare Information Services
Telecom Services - Foreign
Data Storage Devices
Many investors may be surprised to find out that there are two more tech sector stocks than the eight utilities stocks that fit these criteria. Clearly, the tech sector offers comparable income opportunities to other sectors traditionally associated with yield.
Since many dividend investors are attracted to high-paying dividend companies on the premise that they can ignore what the markets do and simply focus on their dividend income, the payback period provides a reality check for how long payback based on dividend payments could take.
If you want to ignore what prices your securities fetch in the markets, you could be waiting a long time to get paid back. Since all the dividend tech stocks except TEO would require more than a decade for payback, investors should rethink a singular focus on dividends before investing in the tech sector.
Disclaimer: This article was written to provide investor information and education, and should not be construed as investment advice. I have no idea what your individual risk, time-horizon, and tax circumstances are: please seek the personal advice of a financial planner. This article uses third-party data and may contain approximations and errors. Please check estimates and data for yourself before investing.