HONEST MONEY: Getting started in tech investing

(iStock)
(iStock)

I get a lot of questions from people asking how they can efficiently invest in tech shares. Most private investors want an easy way to access the tech sector without having to do too much research. Naturally, no one wants to lose money and so people are also looking for a way to manage their risks when buying tech shares. I think many of the good tech companies are expensive so I would be cautious about taking big bets on a handful of tech shares. However, there is merit in the tech sector so I think the answer might be an ETF or fund that spreads risks across a range of different tech companies.

The importance of dividends

Any value investor with experience in the stock market will tell you that dividends are a critical part of generating long term growth from shares. As an example, if you had invested $10,000 in the US stock market from 1926 to 2007, your capital would have grown to $1.2m. However, if you had re-invested the dividends, your capital would have been $33.1m. Dividends are possibly the most important factor in an investment decision. Part of the reason that dividends are so important, is because it is impossible for crooked CEO’s and management teams to lie about dividends. Our recent history with companies like Steinhoff and Tongaat shows the danger of relying on the integrity of management teams at listed companies. Sometimes they are dishonest, but they cannot lie about their dividends - if they don’t have cash, they can’t pay dividends.

The importance of dividends poses a big problem for value investors who want to invest in tech shares because many tech companies don’t pay dividends. Investors in tech shares must rely on the promises made by charismatic CEO’s who might lie. Even if they are not blatantly dishonest, they might be consistently overly optimistic. As an example, I would not stake my life on a promised delivery date of a new Tesla model!

I am reluctant to invest all my money in shares that don’t pay dividends. That is one of the reasons I have avoided ETF’s that invest in the tech sector, especially those offered by some South African product providers. I am not comfortable with all the risks posed by potentially dishonest CEO’s…

You have some options

Fortunately for investors like me, there are now some nice ETF’s that allocate money to the tech sector but only to those tech companies that pay dividends. Standard & Poors have created a great index called the S&P Technology Dividend Aristocrats Index. The index consists of 34 dividend-paying companies including Microsoft, Nvidia, Apple and Oracle. Good ETF providers like ProShares now offer products that track this index.

NASDAQ also has an index of dividend-paying tech shares. The index is called the NASDAQ Technology Dividend Index, and First Trust offers an ETF tracker on this index. The index has 100 Technology and Telecoms dividend-paying companies.

Exercise care

I think many of the good tech companies are expensive and so I would prefer to own tech shares as part of a diversified portfolio. That means investing in the tech sector along with financials, pharmaceuticals etc. I think that multinationals have also embraced technology as part of their core functions and therefore investors would miss out on potential profits by ignoring non-tech shares. For instance, VISA does millions of transactions around the world every few seconds. It would be a mistake to view VISA as a financial services company only, it is a brilliant tech business too. In summary, if you are not keen on buying individual shares, consider a dividend-paying tech ETF that forms part of an overall portfolio. It could be as simple as buying the MSCI World ETF + Emerging Market ETF + Dividend Tech ETF.

Warren Ingram is a Director of Galileo Capital and hosts the HonestMoney Podcast.

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