Get in at the right time, and some of the best tech stocks can make you wealthy. But the wrong ones can take your money faster than a Las Vegas slot machine.
Tech stocks are the darlings of the market. Hot IPOs, venture capital, revolutionary ideas... it’s all so BIG. Tech stocks are the quarterback of the market football team. They’re the star of the market movie. And the best tech stocks can turn your portfolio into tropical vacations, new cars, and luxurious evenings at your favorite restaurants.
But for every profitable tech stock, there’s a dark, sinister doppelganger that’s ready to eat your money and laugh at your misery. Okay, maybe that’s an exaggeration. Still, the world of tech is vast and volatile. You don’t get fast, seemingly unlimited growth without a share of risk.
Further, there isn’t one type of tech company, either. So “tech stocks” could be biotech, financial tech, educational technology, engineering software, and so on. The common thread is that they are technology companies first, and then they specialize from there.
They can also be some of the biggest names in the economy or micro-cap startups. But when you put all those differences aside, the best tech stocks all share some common traits.
The defining characteristics of the best tech stocks to invest in
As a whole, technology stocks have been moving up faster than the general market. The Information Technology sector of the S&P 500 has been the index’s top-performing sector for the past 10-year, 5-year, 3-year, 1-year, and year-to-date periods, outperforming the Nasdaq by well over triple-digit percentages in some cases.
In the future, there is a good chance tech sector performance will be even more dominant than it has been. So how do you get in on this?
The best tech stocks, or for that matter, the best stocks in any industry, have a few common traits:
- The company has a product, service, or business model that is revolutionary.
- Their offering has mass-market appeal.
- The company has plenty of room to grow and is likely already fast-growing.
- The stock has strong RP lines, positive earnings, and reasonable valuation (meaning it’s not overpriced).
- And last but not least, it has a stock that’s trending up, indicating that investors’ perceptions of the company are improving—this is important because perceptions are always at least as important as reality.
Don’t overlook the old-fashioned tech stocks
While they might seem “boring,” there are plenty of older tech stocks that also pay dividends, which is almost always a good indicator of a quality stock. (Just be aware that a dividend alone doesn’t make a stock a good purchase. There are dividend stocks out there hanging on by a thread and don’t have very promising looking futures.)
There’s Microsoft (MSFT), which has grown earnings by an average annual rate of better than 18% for the past five years. That’s astounding growth for an industry behemoth. The stock has returned an average of over 30% per year over the same period. And the company has raised its dividend in all 16 years it has been paying a dividend, and by an average of 13.2%.
For more conservative investors interested in tech, Cabot’s Chief Analyst of Cabot Global Stocks Explorer, Carl Delfeld, recently wrote about International Business Machines (IBM). Remember them? They don’t get a ton of press these days, and you won’t find them on the list of hot brands at your favorite big box computer store. Their stock price has been pretty flat for over a decade.
However, IBM is a world leader in artificial intelligence (AI), meaning there is potential to grow. But what truly makes this “sleepy stock” one of the best tech stocks is the dividend category is this: In 2020, IBM was added to the list of Dividend Aristocrats, meaning they have raised their dividend yearly for 25 consecutive years. So while the stock might not make you rich, it’s a relatively safe investment that will put regular cash in your pocket.
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What do you look for in tech stocks?