The Temptation of Technology Dividends in ETFs
Another year of low interest rates has, once again, sent investors flocking to dividend exchange traded funds. With this year’s 22.4% drop for 10-year Treasury yields, several of the top-performing and best asset-gathering dividend ETFs are those funds heavy on utilities stocks.
Utilities’ status as the S&P 500’s best sector has put the spotlight on dividend ETFs, such as the iShares Select Dividend ETF (DVY) and the First Trust Morningstar Dividend Leaders Index Fund (FDL) , that have significant weights to that sector, but the ongoing ascent of the technology sector as a credible dividend outlet is helping power other dividend ETFs. [Utilities Power These Dividend ETFs]
“Utilities and consumer staples are the two most overweight sectors within equity income ETFs, with average allocations 8.1 and 7.0 percentage points higher than the S&P 500 Index, respectively,” said First Trust Senior Vice President and ETF Strategist Ryan Issakainen in a recent research note.
Many dividend ETFs sacrifice exposure to future sources of dividend growth, such as the technology sector, in favor of sectors’ past dividend track records. Hence, the often substantial overweights to staples and utilities and relatively thin exposure to tech in equity income funds.
The ascent of tech dividends has created a captive audience for ETFs like the First Trust NASDAQ Technology Dividend Index Fund (TDIV) . TDIV has soared in popularity as the technology has progressively become a more legitimate and attractive dividend destination over the past several years. TDIV has added $406.1 million of its $744.4 million in assets under management this year.
While the concept of dividend growth in the tech sector is still relatively new, that does not mean it will not prove rewarding for investors. The sector is one of largest contributors to S&P 500 dividend growth over the past few years. [A Tech ETF for Your Grandparents]
“An equally important consideration for equity income ETFs is which sectors are underweight. As of 9/30/14, technology was the most underweight sector within equity income ETFs, with a 10.1 percentage point lower asset-weighted average allocation than the S&P 500 Index. This is especially notable because the information technology sector’s dividend growth rate has exceeded all other sectors over the past 3, 5, and 10 years and the sector currently pays more dividends than any other sector in the S&P 500 Index,” according to Issakainen.
The average payout increase from Apple, IBM (IBM), Cisco (CSCO) and Qualcomm (QCOM) this year is almost 14%. Those stocks combine for nearly 28% of TDIV’s weight.
Interestingly, “roughly half the dividend-paying technology stocks in the S&P 500 offer higher dividend yields than that of the S&P 500 Index,” notes Issakainen.
