Dividend stocks and ETFs have been extremely popular with investors in the current environment of rock-bottom interest rates. Not only do these stocks and ETFs provide nice current income but they also have much better capital appreciation potential compared with traditional income sources.
While we still remain positive on dividend ETFs, we think that many of these ETFs look a bit expensive now, especially the ones that focus on some of the defensive sectors. Defensive sectors outperformed the broader market during the first four months of this year due to their high dividend payouts and steady performance in an uncertain economic environment, but they have taken a beating this month.
Investors are now warming up to growth sectors as economy is showing further signs of improvement. (Read: Buy these ETFs to profit from sector rotation). And in addition to being attractively valued, some of these sectors—like technology and finance—are increasing/likely to continue increasing their dividends going forward.
During the last five years, technology sector has accounted for more than 54% of the increase in dividends and financials have accounted for the largest increase in last three years, per WinsdomTree.
I believe that ETFs with a dividend-growth focus have a better longer-term performance potential compared with ETFs that focus on high dividend yields. (Read: Top ranked consumer ETFs to buy now)
First Trust NASDAQ Technology Dividend Index (TDIV)
After being beaten down earlier this year, technology sector is finally showing signs of strength. Further many companies in this sector already pay out very attractive dividends; tech titans like Intel, Cisco, Microsoft and Apple, have dividend yields higher than the S&P 500 index. Most large tech companies have huge cash piles on their balance sheet and are in a position to increase their payouts to investors. And many of them double-digit earnings growth potential once the economy picks up steam.
Investors could consider TDIV, which seeks to focus on dividend payers within the technology sector. For being included in the index, apart from meeting minimum market cap and liquidity requirement, the security should have paid a dividend and not decreased its dividend within the past 12 months.
The index employs a modified dividend value weighting methodology and the current top holdings of the fund are Microsoft, Intel, Cisco, IBM and Apple. The ETF has a dividend yield of 1.88% currently and charges an expense ratio of 50 basis points.
Vanguard Financial ETF (VFH)
Financials reported a record quarter even though the quality of earnings was not that great. As a result of increased oversight and improved capital regulations, the industry is now in a much better shape than it was five years back. Moody's Investors Service recently raised its outlook for the U.S. banking industry from "negative" to "stable," the first increase in five years.
Many financial companies including JP Morgan, Wells Fargo, US Bancorp, and MetLife have announced dividend increases recently.
Investors looking for attractive dividend growth opportunities within the financials space could consider Vanguard Financials ETF. The fund charges a low expense ratio of 19 basis points and currently has a dividend yield of 1.88%.
The ETF holds 515 stocks in its basket with highest allocations to Wells Fargo, J P Morgan and Citigroup.
WisdomTree U.S. Dividend Growth ETF (DGRW)
Investors looking for dividend growth opportunities while staying diversified across sectors could consider the new product from WisdomTree that has a has forward-looking dividend growth focus. (Read: WisdomTree Launches New Dividend Growth ETF)
The index uses both growth and quality factors with the growth factor ranking based on long-term earnings growth expectations and the quality factor ranking based on three year historical averages for return on equity and return on assets.
Further, the Index is dividend weighted to reflect the proportionate share of the cash dividends each component company is expected to pay in the coming year. The index has a dividend yield of 2.55% as of now.
Apple, Microsoft, P&G, Wal-Mart and Coca-Cola are the top five holdings as of now. Among the sectors—the fund has highest allocation to Technology, Industrials and Consumer Discretionary sectors. It has an expense ratio of 28 basis points.
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