Tech Stocks: The “Nifty Fifty” for Not-So-Nifty Times

Investors have lots of reasons to dread this weekend and its aftermath.

First there’s Founders Day in North Korea, which falls on September 9. A celebration of the totalitarian state’s founding in 1948, this national holiday is likely to be marked by bellicose demonstrations of military prowess. How the White House responds is anyone’s guess, but if the past is any guide, our Tweeter-in-Chief probably won’t choose diplomatic language.

Then there’s Hurricane Irma, which is expected to make landfall in Florida on Sunday. Irma and its predecessor Hurricane Harvey are a double whammy to the U.S. economy and the federal purse, not to mention hundreds of thousands of lives. Meanwhile, Republicans are fighting a civil war in the wake of President Trump’s surprise deal with Democrats on Wednesday over the federal debt ceiling, just as Congress takes up tax reform and other major legislation important to Wall Street.

You can expect the financial markets to seesaw in coming days, under continued downward pressure. One trend appears resilient, though: the momentum of the technology sector.

During the first six months of 2017, the Dow Jones industrial Average and the S&P 500 each gained 8%, while the tech-heavy Nasdaq outperformed with a gain of 14%. It was the Nasdaq’s strongest first half of the year since 2009.

Two of the largest technology exchange-traded funds, the Technology Select Sector SPDR ETF (NYSE: XLK) and the iShares U.S. Technology ETF (NYSE: IYW) have posted year-to-date returns of 22.61% and 25.19% respectively, compared to 11.74% for the SPDR S&P 500 ETF (NYSE: SPY).

Tech stocks are on the upswing in large part because of increased IT spending among corporate clients, free-spending consumers, and the prospect (albeit diminishing) of lower taxes under President Trump.

And yet, many risk-averse investors remain traumatized by the dotcom bust of 2000, which obliterated $6.2 trillion in household wealth. The ingrained perception has lingered: technology stocks are simply too volatile.

As I’ll explain, that’s a big miscalculation. Select technology companies have matured into growth-and-income stocks that rival the “Nifty Fifty.”

Not your father’s Nifty Fifty…

Let’s set the way-back machine to the Kennedy/Johnson/Nixon era, which witnessed the ascendancy of the Nifty Fifty and their hold on investor imaginations.

During my formative years in the 1960s as a suburban Baby Boomer, my father was a classic Don Draper type of guy. A public relations man, dad commuted to his Boston office every morning in the family’s Chevy Bel Air, wearing a dark suit, starched white shirt, and a skinny tie. In the evenings, he would preside at the head of the dinner table and impart to me his wisdom, which often encompassed investing.

In particular, dad touted the virtues of the Nifty Fifty, a group of buy-and-hold stocks that were popular among institutional and individual investors in that era. These brand name blue chips, exemplified by large-caps such as General Electric (NYSE: GE), Johnson & Johnson (NYSE: JNJ), and Coca-Cola (NYSE: XO), would predominate until the 1973-1974 market crash and subsequent bear market.

If you’re looking for the heirs to the Nifty Fifty, look to Silicon Valley. That’s right, technology stocks are your new retirement bedrocks.

I know, my assertion seems counter-intuitive. Investors looking for dividend growth and robust payouts typically resort to utility, consumer staples and healthcare stocks. The recession-resistant nature of these sectors generates healthy cash flows and hefty dividend yields.

To be sure, the technology realm is home to many stocks that don’t pay any dividends at all. Facebook (NSDQ: FB) and Google parent Alphabet (NSDQ: GOOGL) get fawning coverage on CNBC for their hot growth prospects but they don’t dole out dividends.

You can still find fast-growing “rocket stocks” in the tech sector that rival the mojo of the dotcom days. However, many mega-cap technology companies have matured from start-ups founded in a garage to cash-rich dividend payers. Apple (NSDQ: AAPL), which now offers a dividend yield of 1.56%, is a notable example.

During the go-go 1980s and into the dotcom bubble of the 1990s, the major appeal of technology was hyper-growth. After the bubble burst, the companies that survived the shakeout evolved into established providers of must-have products and services. As their cash hoards have grown, they’ve returned that wealth to investors in the form of dividends.

Lots of cash on hand also provides these tech giants with a cushion for the market correction many analysts see ahead. It also allows them to make the consistently strong research and development (R&D) spending that’s necessary for tech companies to maintain their competitive edge.

If Trump fulfills his promise to allow tech companies to repatriate overseas cash for a lower domestic tax rate, you’ll see an explosion of R&D and acquisitions. In turn, you’ll see an acceleration of tech sector growth.

In the second quarter of 2017, the technology sector racked up the second-highest year-over-year earnings growth among 11 sectors, at 15.1% (according to research firm FactSet). The top performer in the second quarter was energy at 329.9%, but that astronomical growth rate was mainly an anomaly due to unusually low earnings in the year-ago quarter because of severely depressed energy prices. At the sector level, technology stocks within the S&P 500 currently boast the highest level of buy ratings, at 58%.

Innovation, growth and income…

Innovation continues to drive the growth of mature and start-up tech companies alike. The expansion of smartphone capabilities, the cloud, the Internet of Things, autonomous vehicles, virtual/augmented reality, “green” technology, and artificial intelligence are powerful multi-year tailwinds that ensure earnings growth and cash-rich balance sheets.

Biopharmaceutical breakthroughs in such areas as immunology and oncology can be added to the mix. The biotech industry relies on the goodwill of regulators, politicians and the public. Last year, this goodwill was in scant supply and scores of intrinsically sound companies got tarnished with the same brush.

But now the political pressure on biotech is easing, as congressional committee hearings into biopharmaceutical scandals fade into memory and Donald Trump’s populist promises to crack down on drug pricing are supplanted by his moves toward deregulation. Several drug companies in the vanguard of growth-driving innovation play dual roles as reliable dividend generators.

Income investors also are enjoying the emergence of new investment breeds that are hybrids of growth and income — notably, real estate investment trusts (REITs) that own datacenters. These high-dividend REITs construct, own and operate remote datacenters for corporate clients.

REITs have existed for about 50 years, but datacenter REITs provide leading-edge cloud and storage capabilities for sophisticated technology companies such as Amazon (NSDQ: AMZN). These REITs give investors the best of both worlds: dividend-intensive real estate combined with growth-oriented technology.

If you want to retire comfortably, you need to build a multi-faceted portfolio that not only includes classic dividend payers (e.g., utilities), but also stocks that bestow dividend growth and the potential for capital appreciation. Contrary to popular misconception, the technology sector fits the bill on all counts.