IT Stocks: Information Technology Offers Growth and Dividends

Some of these IT stocks seem rather undervalued.

Apr 8, 2014 at 5:16PM

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some IT stocks to your portfolio but don't have the time or expertise to hand-pick a few, the Vanguard Information Technology ETF (NYSEMKT:VGT) could save you a lot of trouble. Instead of trying to figure out which IT stocks will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. This ETF, focused on IT stocks, sports a very low expense ratio -- an annual fee -- of 0.14%. It yields about 1%, though some of its components sport significantly higher payouts.

This IT stock ETF has outperformed the world market over the past three, five, and 10 years. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

Why IT stocks?
The information technology field is especially promising, given the ongoing spread of technology and its continuous innovation. The IT stocks in this ETF are varied, focusing on computing hardware, software, and services, and ranging from chips to fiber to selling platforms and business analysis. Some of them offer attractive dividend yields, as well as likely stock-price appreciation.

More than a handful of IT stocks had strong performances over the past year. Micron Technology, (NASDAQ:MU), for example, surged 131%. It hasn't paid a dividend since the 1990s, but with its current strength and growing profit margins, some expect a dividend reinstatement. Micron Technology recently reported its second-quarter results, which topped expectations although higher volumes were somewhat offset by lower prices. With demand growing for solid-state drives, bulls like the company's investments in NAND memory technology, and see demand for 3D NAND technology driving growth at Micron and elsewhere. Given the stock's forward P/E below nine, my colleague Anders Bylund has dubbed Micron "a high-octane growth stock, but priced like a sleepy value play."

Hewlett-Packard Company (NYSE:HPQ) jumped 52.5%. It yields 1.8%, with some arguing that the payout doesn't sufficiently compensate for underperforming operations. The printing giant has been hurt by the weak PC market, but its last quarter featured estimate-topping revenue and earnings, with earnings rising 10% over year-ago levels and revenue dropping by 1%. The company has been cutting costs aggressively as it aims to expand in areas such as 3-D printing and health care analytics. (It's such a big company, though, that some initiatives may not make a meaningful difference, even if successful.) It has been racking up some significant contracts, too, such as one worth up to $32 million from the Department of Homeland Security and one worth up to $548 million with the Department of Defense. The company's forward price-to-earnings (P/E) ratio of 8.5 is appealing, but Hewlett-Packard's future is rather uncertain.

Intel Corporation (NASDAQ:INTC) gained 30% and offers a solid 3.4% dividend yield. It recently got the boot from Samsung tablets and has lost some 64-bit ground to competitors, but all is not lost. It retains its dominant market position, its data centers hold much promise, and it's making inroads in areas such as health care, too. Bulls have high hopes for its enterprise server platform and its Broxton chip, which serves both tablets and phones.

Other IT stocks didn't do quite so well over the last year but could see their fortunes change in the coming years. Cisco Systems (NASDAQ:CSCO) advanced 14.5% and offers a sizable 3.3% dividend yield. It has been buying back lots of stock, too. Gross margins have been shrinking, while cash flow has not been growing very briskly, but the company still produces a lot of cash. Bulls see it as undervalued and like its growth in data centers and security, as well as its potential in cloud computing and data analytics.

The Big Picture
If you're interested in adding some IT stocks to your portfolio, consider doing so via an ETF. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

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Selena Maranjian, whom you can follow on Twitter, owns shares of Intel. The Motley Fool recommends Cisco Systems and Intel. The Motley Fool owns shares of Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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