Shares of International Business Machines plunged Tuesday after an earnings warning, and it's a warning to dividend investors everywhere.

IBM has always been a popular stock for its performance and dividend, so investors got a bit of a shock when shares fell more than 25% Tuesday. It was on pace for its worst day in decades after the company said it would miss earnings forecasts because of an artificial intelligence-related shift in its customers' spending.

Factoring in Tuesday's big selloff, IBM's dividend yield jumped to 3.1% from 2.2%, according to FactSet. Despite the disappointing earrings, Big Blue's payout should not be considered in danger. The company generated about $13 billion in free cash flow over the past year, more than double the $6 billion cost of its annual dividend.

But the stock's price volatility does offer a warning to dividend investors, who often want not just income but a cushion against wild market swings. Tech stocks like IBM pay a significant share of the market's dividends, and they make up a big slice of many dividend funds and exchange-traded funds. That's not necessarily a bad thing -- as long as you aren't caught by surprise.

IBM is a top holding in a number of dividend ETFs, according to Morningstar data. It's nearly 8.5% of the First Trust Nasdaq Technology Dividend, which was down about 1.7% on Tuesday. IBM also features prominently in some funds that don't have "technology" in their names. The stock is 6% of the Invesco Dow Jones Industrial Average Dividend -- down 1.8% Tuesday -- and 5% of the iShares Core Dividend -- down 2.1%.

Technology in general has a large presence in many dividend funds, too, especially those that favor stocks that raise dividends over those with high yields. Vanguard Dividend Appreciation, the market's largest dividend ETF, with just under $130 billion in assets, has about 29% invested in technology stocks, only a bit less than the 33% in the typical large blend fund, according to Morningstar.

There is a good reason for dividend investors to own a big helping of technology stocks. Vanguard Dividend Appreciation has returned 13% a year over the past decade, only a bit behind the broad market's return of 15%. Most funds that market themselves as targeting dividends have returned 10% a year or less.

It's also worth noting that some tech stocks are massive dividend payers. Tech stocks yield only 0.4% on average, lower than any other sector. But in dollar terms, several tech giants are among the market's biggest payers. Microsoft, which yields 0.9%, pays investors $24 billion in dividends a year, more than any other stock in the S&P 500, according to FactSet. Apple, with a 0.3% yield, pays out $15 billion, Google parent Alphabet, which also yields 0.3%, pays out more than $10 billion.

In a note Tuesday, J.P. Morgan Securities strategist Mika Inkinen noted that during the post-Covid era "traditional dividend income funds" generally underperformed the broader market. As a result, there has been an increase in funds that employ strategies like dividend growth, shareholder yield (i.e., targeting dividends plus buybacks), and enhanced equity income strategies, such as writing covered call options.

Those tactics might not outperform in the coming years. "With the AI hype likely to eventually normalize, the regime we are likely to be on over the next ten years is in our opinion more likely to be like the '1963--1989 Normal business cycle swings' rather than the current '2020--2026 Post-COVID -- AI era" regime,' writes Inkinen.

Fortunately, there are plenty of tradition-minded options. Vanguard's second-most popular dividend ETF, the $96 billion Vanguard High Dividend Yield ETF, has 20% invested in technology stocks. The $99 billion Schwab U.S. Dividend Equity ETF has only 13%. Both funds have delivered solid average annual returns of about 12% over the past decade.

Write to Ian Salisbury at ian.salisbury@barrons.com

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July 14, 2026 16:47 ET (20:47 GMT)

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