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Non-Conventional Wisdom Works For Some Dividend ETFs

ETF Professor

Over the years, many dividend investors have been conditioned to believe that, at the sector level, utilities are a dividend mecca while technology is a dividend wasteland.

While once accurate, that is an interesting view of the indexing landscape when considering technology accounts for 21.6 percent of the S&P 500's weight, or more than six times the weight devoted to utilities stocks. Unfortunately, many indexes tracked by some popular dividend exchange-traded funds do not feature much technology exposure, but many of these benchmarks are overweight utilities relative to the S&P 500.

Fortunately, indexes and the ideas behind them and there are some ETFs that feature technology exposure that is more in line with that of the S&P 500. More importantly, some of these funds reflect the technology sector's growing prominence as a major contributor to S&P 500 cash dividends paid and expected payout growth.

Any conversation about dividend ETFs with robust technology exposure must include the WisdomTree U.S. Quality Dividend Growth Fund (WisdomTree Trust (NASDAQ: DGRW)). DGRW allocates 21.2 percent of its lineup to technology stocks. Conversely, utilities are not among the seven sectors represented in the ETF.

“The fastest growth in total dividends being paid from any sector in the last 10 years came from the technology sector, and now the single largest sector in the WisdomTree LargeCap Dividend Index — which allocates weight according to total dividends indicated to be paid — is the tech sector,” said WisdomTree Research Director Jeremy Schwartz in a recent note.

DGRW follows the WisdomTree U.S. Quality Dividend Growth Index. That index combines long-term earnings growth expectations with return on equity and return on assets. In other words, it makes sense that utilities stocks are not present in DGRW because the sector's earnings growth is historically slow and many utilities stocks are saddled with large debt burdens. Some of that debt was accrued in the name of continuing dividends.

The utilities sector has also been home to fewer share buybacks than tech over the years because some utilities companies have issued new shares to fund dividends.

“What is interesting is how the Utilities sector’s total shareholder yield over last 20 years has displayed a few distinct trends where companies were issuing shares to fund their growth/dividends from the late 1990s to 2003, and there was actually a negative net total shareholder yield given a lot of share issuance,” added Schwartz.

Disclosure: Todd Shriber owns shares of DGRW.

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