A Look at the New Tech Dividend ETF
The technology sector is finally getting in on the dividend craze and doing so in a big way. For years, tech stocks were prized for their growth prospects -- not payouts and yields -- but that is starting to change.
Some tech companies have responded to investor pressure and the results have been palpable. "Moody's projects the tech sector will pay out $26 billion in dividends in 2012. That is an increase of 14.3% from 2011 and higher than the 10.9% average annual growth of the prior four years," said Moody's Investors Service.
A new ETF has debuted that aims to capitalize on the growth of tech dividends: the First Trust NASDAQ Technology Dividend Index Fund (NASDAQ: TDIV). Tuesday was the first day of trading for the First Trust NASDAQ Technology Dividend Index Fund, so passing judgment on the fund's performance is not fair as of yet.
However, with the number of dividend ETFs expanding by the week and investors continuing their search for yield, a look at TDIV's composition is warranted. TDIV charges an expense ratio of 0.5 percent, which is far higher than the Technology Select Sector SPDR (NYSE: XLK) and popular dividend ETFs such as the Vanguard Dividend Appreciation ETF (NYSE: VIG). Conversely, it can be said that annual fees of 0.5 percent are fair for an ETF that is as narrowly focused as TDIV.
The number 0.5 percent is important to remember as it pertains to TDIV because it is not only the fund's expense ratio, but the minimum yield that a stock must have to be included in TDIV's index. Said another way, TDIV can allocate up to 20 percent of its weight to telecommunications stocks and high-yielders such as AT&T (NYSE: T) and Verizon (NYSE: VZ) are found among the fund's current lineup, but the impact of robust telecom yields is muted by the 0.5 percent yield watermark.
Qualcomm (NASDAQ: QCOM), which yields just 1.6 percent, is TDIV's top holding. In fairness, it is worth noting that Qualcomm's dividend has nearly tripled since 2006. Microsoft (NASDAQ: MSFT), International Business Machines (NYSE: IBM), Intel (NASDAQ: INTC) and Cisco (NASDAQ: CSCO) round out TDIV's top-five holdings.
IBM has been a prodigious dividend payer for years, so it is not surprising to see included in TDIV. Intel and Microsoft have steadily become better dividend payers in recent years and Cisco's recent dividend increase shows the company is at least trying to reward shareholders for sticking with the stock.
The problem with TDIV is not those holdings, it is fare such as Oracle (NASDAQ: ORCL), which yields just 0.8 percent and pays a paltry quarterly dividend of just $0.06 per share. The inclusion of HP (NYSE: HPQ), which accounts for three percent of TDIV's weight, is curious as well. Defense of HP's inclusion in the ETF revolves around the stock's 2.7 percent and two dividend increases since 2011.
On the other hand, HP's last dividend increase prior to 2011 was in 1998, so the firm has a long way to go before it can be considered a dividend growth stock.
The bottom line for TDIV is not that the concept is flawed or that it is a "bad" ETF. Neither is true. In fact, the concept of a tech dividend ETF has merit because of the growth of payouts within the sector. However, TDIV is an example of a new ETF that investors will want to give some time to mature and perhaps wait for the fund's first rebalancing that will hopefully include more high-yielders.
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