Best bets in tech for 2012

(MONEY Magazine) -- Seeking shelter from the stormy market? Think tech, especially big, established technology companies, which could rival traditional plays like utilities and consumer staples as premier defensive investments.

Financial strength is one key reason, notes James Swanson, chief investment strategist for MFS Investment Management. The tech sector is the only group in the Standard & Poor's 500 with more cash than debt on its books. That has enabled many tech giants to initiate or hike dividend payments. While the group's average 1.1% yield is still only half the S&P's, there's plenty of room to increase the payout.

Even more important, keeping current on technology is increasingly an imperative for business. To stay competitive, firms have to update software and invest in new hardware.

Result: "The tech sector has become less vulnerable to the business cycle," says George Sertl, co-manager of the Artisan Value fund. Worldwide, corporate IT spending is expected to grow 4.6% this year. And U.S. tech companies, which get more than half their revenue abroad, should be direct beneficiaries.

A couple of standouts:

Microsoft (MSFT, Fortune 500)

Over the past decade Microsoft has lagged as new competitors entered the picture, and its PC business slowed with the advent of mobile computing. Yet it remains a stable franchise with a giant reach.

The company's flagship product, Windows, is still the most widely used operating system in the world -- 94% of PCs shipped last year had Windows 7 installed. And the company, which gets more than 80% of its sales going forward as businesses seek to upgrade technology.

"There is a provider stickiness in corporate IT that the consumer side doesn't have," says Keith Trauner, co-manager of the GoodHaven fund, which counts Microsoft among its top holdings.

Further enhancing its prospects: Microsoft will finally establish itself as a player in the new tech age when Windows 8 makes its debut this fall. The system will have touch compatibility (good for smartphones and tablets) and will also run on ultrabooks (a cross between a tablet and a notebook), which should create new avenues of growth.

Meanwhile, the stock is cheap, trading at 8.4 times estimated 2012 earnings, vs. 11.5 for the sector, with a 3.1% dividend yield.

EMC (EMC, Fortune 500)

EMC has long been a leader in data storage for Fortune 500 companies. Now the company is at the forefront of the next big thing in tech, storage virtualization, which lets IT departments within a company pool capacity and operate more efficiently. The market potential is huge: A study by Symantec last year found that over 80% of businesses have or are considering virtualized data storage.

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EMC is more than a one-trick tech pony. The firm also provides virtual servers (which reduce the number of dedicated machines needed to run applications) and is expanding into data solutions for smaller companies. This product diversity will support solid growth, says Matthew Kamm, co-manager of the Artisan Growth Opportunities fund, which owns the stock.

Earnings are expected to climb 16% a year through 2016. That's a tad slower than some competitors, but EMC seems to be the better value, with a P/E of 14 times next year's estimated earnings, vs. 25 for some rivals.

Technology Fund Picks

You can buy a diversified group of tech stocks through the Vanguard Information Technology ETF (VGT), which has low annual expenses of 0.24% and owns 400-plus IT stocks, including EMC and Microsoft.

Among actively-managed funds, Columbia Seligman Communications and Information (SLMCX) has beaten 86% of its peers in the past decade. Annual fee: 1.36%, vs. 1.65% for the typical tech fund.

More from the 2012 Investor's Guide:

Cash in on a consumer comeback

Industrial stocks: Ready for a rally