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SMART INSIGHTS FROM PROFESSIONAL ADVISERS

What are the New Tech Stocks of 2018 and Beyond?

Investors have scratched their heads for years over which tech companies to invest in. Rather, they should dig deeper into what's fueling growth in the tech sector itself, tracing those roots to ETFs to help reap the rewards.

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What are the new tech stocks of 2018 and beyond? Guess what — no one knows! If I was asked to pick a single technology stock a year ago, it would have been like finding a needle in a haystack. And I’m the CEO of an ETF company!

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Instead, there’s a better way to determine where to direct your investment dollars. Rather than picking a particular company to invest in, pick a technology itself. Or, more specifically, an industry within the tech sector, one on which the entire field relies. More on what that might be in a bit.

First, there’s no getting around the fact that technology companies now dominate the stock market. Below is a chart showing the top 25 companies in the S&P 500 index. You’ll notice that five tech companies now occupy the top five slots and eight of the top 25 are technology companies — compared with 20 years ago, when just two of the top five were tech and only five tech companies were in the top 25.

The Changing Face of Technology in the S&P 500

S&P Market Cap Leaders
1998 April 2018
1. Microsoft 1.Apple
2.General Electric2.Amazon.com
3. Intel 3.Microsoft
4.Walmart4.Alphabet
5.ExxonMobil5.Facebook
6.Merck & Co Inc6.Berkshire Hathaway
7.International Business Machines7.JPMorgan Chase & Co
8.Nokia of America8.Johnson & Johnson
9.Coca-Cola9.Exxon Mobil
10.Pfizer10.Bank of America
11.Cisco Systems11.Walmart
12.Bristol-Myers Squibb12.Visa
13.AT&T13.Wells Fargo & Co
14.WorldCom14.Intel
15.Altria Group15.Chevron
16.Procter & Gamble16.UnitedHealth Group
17.Citigroup17.Pfizer
18.Johnson & Johnson18.Cisco Systems
19.AT&T19.Home Depot
20.Bank of America20.Verizon Communications
21.American International Group21.AT&T
22.Eli Lilly & Co22.Boeing
23.BellSouth23.Oracle
24.Dell24.Mastercard
25.JPMorgan Chase & Co25.Coca-Cola

It’s clear that technology is much more pervasive than it was just 20 years ago. Amazon is now the nation’s largest retailer, though it’s considered a tech company; and Visa and Mastercard are now among the largest purveyors of financial transactions, and are increasingly investing in technology for record keeping, fighting fraud and speeding up transactions. Technology, alas, is in everything.

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Which industries within technology

Blockchain technology, cloud computing, semiconductors, video games, software and the “Internet of Things” are now eternally locked together and rely on technologies that couldn’t exist without each other. It’s hard to invest in just one industry within tech, but I would prefer to allocate my money in just two or three of those industries within the broader technology sector. Investing in exchange-traded funds (ETFs) allows me to do so.

For the next year, if I had to pick technology stocks, I would probably choose three tech realms to invest in:

  • Blockchain technology
  • Semiconductors
  • Quality technology companies that pay dividends

My investments would not be in individual companies, but rather a basket of technology stocks, like an ETF, allowing me to gain exposure to one slice of the tech sector while diversifying my investments across many companies.

How dividends can help identify tech stocks that are poised for growth

Disappointingly, of the top five tech companies, only Apple and Microsoft pay dividends. Still, 20 years ago none of those companies paid dividends. To some extent, paying dividends is the sign of a company maturing and one that wants to reward investors for investing with the company. I see dividends as a significant indicator of a company’s health and growth.

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Apple began paying dividends in 2012 and has been consistently making and growing quarterly cash dividend payments to shareholders. Apple’s annual dividend yield is currently 1.6%. Likewise, Microsoft has routinely paid a quarterly dividend that yields 1.7% today.

At Reality Shares, we feel that screening for quality in tech is paramount, and our proprietary dividend health rating system, DIVCON®, allows us to screen for dividend growth prospects. We evaluate each firm based on seven quantitative factors — expected dividend growth, free cash flows, earnings per share growth, recent dividend actions, buybacks and repurchases, fundamentals (according to Bloomberg) and Altman Z-scores (which measure credit strength) — to rank each company by its quality-based dividend health score.®

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Why those 3 slices of technology?

Analyzing a company’s dividend growth is just one method helping identify the three sectors of technology that I believe are poised for growth. Another is the methodology that our blockchain ETF utilizes. First, I should point out that I believe that blockchain is one of the biggest innovations since the advent of the Internet. Blockchain is the underlying technology that bitcoin, a cryptocurrency, was built on, and it is the technology allowing for assets to be stored and transported over the Internet. It is a profound technology that is going to have broad, sweeping effects across all segments of the economy, regardless of what you’re looking at.

As to what we consider could be the next wave of technology, we also developed a screening system for companies in the blockchain space. A company gets a Blockchain ScoreTM that ranks its potential impact in this quickly growing market segment. These factors include the potential for increased economic profit, operational efficiencies and transformational business practices – analyzed to uncover the companies with the most potential within the blockchain economy. That is why the top-ranked Blockchain Scores include several of the tech companies, such as Intel, Amazon and Microsoft, which have the servers, microchips and technology that host blockchains.

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Semiconductors are another one of the industries within technology that stands to gain from blockchain technology.

ETFs vs. mutual funds to get technology exposure

Could I get the same tech exposure by making my investments in anything but an ETF? Not really. Let me tell you why. For me, the only competing investments that would give me the right exposure and diversity are mutual funds. But mutual funds tend to fall short, in part, because they tend to charge higher fees and rely on active fund managers to pick the stocks, rather than basing them on indexes. Furthermore, if you planned on trading intraday, you wouldn’t be able to do so with mutual funds as they are only priced once a day, at the market close.

To summarize, there is no crystal ball to predict where technology is going to move, but there are ways of making sure your investments capture enough of the potential upside of whatever the next successful app or technology is likely to be.

See Also: Be More Like Warren Buffett, Less Like You, When Investing Your Money

Learn more about how we rank and analyze dividend-paying stocks or see how we rank companies investing in blockchain technologies using advanced analytics. Find important information and disclosures at http://www.realitysharesadvisors.com/.

Eric Ervin founded Reality Shares, a firm known for ETF industry innovation. He led the launch of investment analytics tools, including Blockchain Score™, a blockchain company evaluation system; DIVCON®, a dividend health analysis system; and the Guard Indicator, a directional market indicator. These tools were designed to help investors access innovative investment strategies as well as provide alternative dividend investment solutions to manage risk.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.