Another reason to favor tech stocks: room for dividend growth

Consider Microsoft and Apple—two of the lowest-yielding stocks on the list—but they delivered the highest total returns among this group in 2020. Both raised their dividends in 2020, with Microsoft increasing its payout by 10% in September. Another strong performer was chipmaker Qualcomm (QCOM), yielding 2.1%; its return this year has approached 40%. Yet some higher-yielding names—particularly IBM (IBM) and Cisco—posted negative returns in 2020. Still, in certain cases, investors can have it both ways: high yield and robust capital appreciation. Texas Instruments (TXN) is one such example, offering a yield of around 3% and rising 15% year-to-date (including dividends). Semiconductor manufacturer Broadcom (AVGO) fits the same profile, with a 3.5% yield and a 20% return. That said, the technology sector does raise concerns—chief among them being elevated valuations driven by pandemic-era stock price gains. According to FactSet data, the Technology Select Sector SPDR Fund (XLK), which tracks the tech sector, recently traded at roughly 25 times its underlying holdings’ expected earnings for next year—well above its five-year average of 17.6 times. Nonetheless, Keith Lerner, Chief Market Strategist at SunTrust Private Wealth Management, is adding to his tech holdings, citing “strong fundamentals and investor preference for stable growth trends.” He wrote in a recent client report. Barclays notes that relatively low payout ratios are another factor making these stocks—and their dividends—attractive. While several metrics exist for measuring payout ratios, Barclays focuses on dividends as a percentage of free cash flow—the difference between operating cash flow and capital expenditures. Barclays reports that for the tech companies in the fund he co-manages, this ratio stands at just 44%. He identifies this as one of three reasons why tech stocks can deliver attractive dividends: “durable cash flows capable of growing over time, strong balance sheets, and moderate payout ratios.” He favors a long-term investment approach: “When you buy shares of companies with solid fundamentals capable of supporting dividend growth, you’ll see healthy dividend growth rates over time,” he says. One company he favors is analog chipmaker Texas Instruments. The firm recently announced a quarterly dividend of $1.02 per share—an increase of 13% from $0.90. Its chips serve diverse industries, including automotive—reducing overreliance on any single customer. “You’ll continue to see chips deployed more broadly across sectors—not just smartphones and PCs, but also automobiles, industrial equipment, and consumer goods,” Barclays notes. He also likes semiconductor equipment companies—including Lam Research (LRCX) and KLA (KLAC), which yield 1.5% and 1.8%, respectively—both well above the 1% average yield for tech stocks in the S&P 500.

Unfazed by pullbacks, Barclays believes SK Hynix can double!

Barclays delivered a powerful endorsement of SK Hynix’s U.S.-listed shares with a highly impactful research report. On Tuesday, July 14, Barclays initiated coverage of SK Hynix with an “Overweight” rating and set a $330 target price—implying approximately 100% upside from the stock’s closing price that day and suggesting the share price could double within the next year. Fueled by this report, SK Hynix’s American Depositary Receipts (ADRs) surged over 27% on Tuesday, landing among the top ten most-discussed stocks on Stocktwits. Barclays’ core thesis rests on three key pillars: persistent memory shortages across the tech industry will support pricing power and drive revenue growth; SK Hynix’s dominant position in high-bandwidth memory (HBM) will command significant pricing premiums; and the company’s substantial cash reserves provide ample firepower for large-scale share repurchases. This view strongly aligns with broader Wall Street sentiment: according to Koyfin data, among the 37 analysts covering SK Hynix, 36 assign a “Buy” or “Strong Buy” rating—only one holds a “Hold” stance. The $330 target price: Where does the doubling logic come from? Barclays’ $330 target price is the most striking figure in the report. Analyst Simon Coles wrote in Tuesday’s note: “We believe near-term gross margins offer some upside potential, but our biggest divergence from Bloomberg consensus lies in significantly higher 2027 revenue forecasts—driven by HBM pricing improvements and SK Hynix’s strong market positioning.”

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