Equity income funds — those that seek companies which pay dividends — have been around for many decades, with the notion being that finding mature businesses that pay healthy levels of income can lead to an attractive total return in the long term.
Indeed, when looking across a range of global equity markets and focusing on the long-term real returns (adjusting for inflation), the two key drivers are the dividend yield and the growth of that dividend stream over time.
Focusing on well-established companies that pay dividends tends to also have the added benefit of offering some defensiveness in periods of market drawdowns.
In general, equity income funds have done an excellent job historically of offering better downside protection compared with other types of equity funds in the market. However, when it comes to keeping pace in periods of rising markets, they have tended to lag materially.
This mainly stems from the traditional types of sectors in which these funds invest, such as consumer staples, healthcare, financials and utilities. These are often the bedrock of many income funds, but it begs the question: with the technology sector — especially in the US — being such a key driver of market returns over recent years, can income funds access opportunities here?
More tech companies are paying dividends
The short answer is undoubtedly “yes”. Whereas compared with the early 2000s when the sector was still very much in its infancy, there are far more tech companies now paying dividends.
Indeed, looking at the US tech sector, almost 60 per cent of companies now pay some form of dividend compared with 20 per cent back in 2005.
But surely all that really matters are those Magnificent Seven companies, and they must be far too growth oriented to be bothered to pay shareholders dividends?
Think again. Take Microsoft as an example — the company has been paying a dividend for well over two decades, going back to 2003. Apple and Nvidia have notched more than a decade as dividend-paying stocks.
With Alphabet and Meta joining the dividend-paying party last year, that just leaves Amazon and Tesla as the two names that do not offer any form of dividend.
Almost 60 per cent of US tech companies now pay some form of dividend compared with 20 per cent back in 2005
But why is this so important? Paying a dividend can be seen as a signal of a companies’ confidence in the future cash generation of the business. While dividends are not binding, company management tends to be reluctant to cut them, and often the ability to continue to support a dividend in more difficult times — such as recessions — can be viewed as a sign of resilience in the business model.
But what about beyond these seven titans of the market? There are other parts of the sector that offer dividends and are empowering the growth of these tech companies.
Within semiconductors, Broadcom, which supplies custom silicon chips that are used in the data centres customers such as Google and Meta are building, as well as Taiwan Semiconductor Manufacturing, which produces nearly all of Nvidia’s chips, both have strong track records of paying dividends to shareholders.
At this point, investors might well ask: surely the dividend yields on these stocks are far too low compared with other parts of the market? And yes, they would be right, the headline yields in all of the names mentioned will not get the pulse racing if it is just yield they are after.
Key driver of growth
But what should excite investors more are the levels of income growth on offer. As outlined earlier, this is also a key driver when it comes to generating returns ahead of inflation.
Many of these names have grown their dividend at very healthy rates over the past decade, well above double-digit compounded growth every year in many cases — Apple is the one exception to this, and even then it still compounded its dividend at a respectable 5 per cent a year over the past five years.
The importance of income investors being able to access these parts of the market is crucial. It offers the ability to keep pace with some of the more growth-oriented areas of the market, but importantly does not need to come at the significant detriment of offering defensiveness in periods of market volatility — as we saw in the aftermath of DeepSeek and so-called “liberation day”.
The benefits of investing in dividend-paying companies still holds true as it has throughout the history of investing. However, it is clear income funds must still adapt their approach to be as relevant, in a period where tech companies are very much at the forefront of investors’ attention.
Richard Saldanha runs the Aviva Investors Global Equity Income Fund