Tech stocks have been some of the best performers in the market so far this year. Technology, as measured by the SPDR Technology Select ETF (XLK), is up 26.7% for the year in the closing days of 2024.
The broader tech-heavy Nasdaq is up more than 33%. Mega-cap tech companies have become particularly attractive for investors looking for growth with some measure of safety (such as companies with high levels of cash on hand).
But, as we’ve seen this year, just being a tech company doesn’t guarantee growth. With the Fed lowering expectations for rate cuts in 2025 and some broad market weakness, it’s still too early to tell whether the dynamic will change and underperforming tech stocks (especially small caps) will begin to outperform.
Tech stocks, in general, tend to operate on the cutting edge, which means higher risks and higher rewards. 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.
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The Defining Characteristics of the Best Tech Stocks
As a whole, technology stocks have been moving up faster than the general market. The Information Technology sector of the S&P 500 has nearly doubled the return of any other sector over the last five years.
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.
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 20% 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 persistently raised its dividend for the last decade.
Or consider a stock like 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 (up a mere 49%, less than 5% per year).
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 in 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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