Microsoft (MSFT) surprised the market with the announcement of a big dividend hike. The news has sent the dividend payout ratio for the S&P 500 companies to a 15-year high.
The software giant raised its quarterly dividend by 22% to 28 cents per share, reflecting its strong commitment to deliver increased income to its shareholders. The new dividend will be paid on December 12 to shareholders of record as of November 21.
The new annual payout of $1.12 represents a dividend yield of 3.4%, which is ahead of its major rivals – International Business Machines (IBM) and Apple (AAPL). This is also above the S&P 500 average yield of 2.4% (read: 3 Excellent ETFs for Growing Dividends).
Further, MSFT also approved a new share buyback program of up to $40 billion, which has no expiration date.
Impact on ETFs
Taper talks have dampened the appeal for dividend stocks and ETFs over the past couple of months. However, some ETFs in this corner of the market would still remain attractive choices for long-term investors. These ETFs not only provide decent current income, but also offer better capital appreciation potential than the traditional income sources (read: High Dividend ETFs to Buy Even If the Fed Tapers).
As per the S&P, dividend net increases (increases less decreases) grew 17% during Q2 as 591 companies reported dividend hikes. The trend is expected to continue in the coming months as most large companies have huge cash piles on their balance sheets, and are well placed to increase payouts to shareholders.
Currently, investors are more optimistic on high growth sectors like technology and finance courtesy of improving global economies and a consistent increase in dividends. Over the past one year, technology has been the best dividend paying sector in the S&P 500 (see more in the Zacks ETF Center).
According to WisdomTree, the technology sector has accounted for more than 54% of the dividend increase over the past five years so this could just be another step on this path.
ETFs to Watch
The recent move by MSFT could add growth opportunities in the dividend ETF space. The ETFs with a dividend-growth focus are expected to perform better over the long term compared to funds that focus on high dividend yields (see: all the Large Cap ETFs here).
Below, we have highlighted three popular dividend ETFs that are heavily invested in this software company and would be in focus in the coming months. Investors should closely monitor the movement in these funds and catch an opportunity when it arises:
First Trust NASDAQ Technology Dividend Index (TDIV)
This fund seeks to focus on dividend payers within the technology sector by tracking the Nasdaq Technology Dividend Index. The fund has accumulated $196.3 million in its asset base and currently holds 78 securities in its basket.
The top five holdings – Cisco (CSCO), AAPL, Intel (INTC), MSFT and IBM - pay out attractive dividends which are higher than the S&P 500 index. These firms make up for nearly 38% of assets in the fund’s portfolio.
The ETF currently yields 2.16% in annual dividends and charges an expense ratio of 50 basis points. The fund added nearly 20% in the year-to-date timeframe.
WisdomTree U.S. Dividend Growth ETF (DGRW)
This fund follows the WisdomTree U.S. Dividend Growth Index and offers diversified exposure to 294 dividend-paying stocks from various sectors with growth characteristics. It has gathered $53.7 million in AUM since its debut four months ago (read: WisdomTree Launches New Dividend Growth ETF)
The product provides double-digit allocation to four sectors – industrials (20.68%), information technology (20.18%), consumer discretionary (19.84%) and consumer staples (18.21%). In addition, AAPL, MSFT, Procter & Gamble (PG), Wal-Mart (WMT) and Coca-Cola (KO) are the top five holdings making up for a combined 18.43% share.
The fund has a 30-day SEC yield of 2.01% and charges 28 bps in fees per year from investors. DGRW is up 3.1% since inception.
iShares High Dividend ETF (HDV)
This ETF tracks the Morningstar Dividend Yield Focus Index, holding 75 stocks in its basket that offers relatively high dividend yields on a consistent basis. The fund is among the largest and most popular in the space with AUM of over $3 billion while charging 40 bps in fees per year.
The product is tilted towards the healthcare sector at 21.45% of assets while consumer goods and utilities take the next two spots at 18.07% and 14.15%, respectively. AT&T (T), Chevron (CVX), Johnson & Johnson (JNJ), PG and MSFT are the top five holdings making up for a nearly 34% combined share.
HDV currently sports a dividend yield of 3.14% and returned 18% so far this year to investors (read: Buy These 3 ETFs for Excellent Dividend Growth). The ETF has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with ‘Low’ risk outlook, suggesting that the product is expected to outperform its peers over the one-year period.
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- dividend payout ratio