There are a few certainties when it comes to dividend
. First, investors like these funds. A lot. Inflows data says as
For example, the Vanguard Dividend Appreciation ETF (NYSE:
), the largest U.S. dividend ETF by assets, is among the top-10
asset-gathering ETFs. That is ALL U.S. ETFs. The SPDR S&P
Dividend ETF (NYSE:
) has not been a slouch either in terms of year-to-date inflows
with over $1.1 billion.
Another certainty is that by embracing many of the most
popular dividend ETFs, investors are committing to a fund that is
A) Likely heavy on staples and utilities stocks and B) Probably
light on financial services and technology stocks. It is not that
the "old school" dividend ETFs are bad. They are not, but
there are good reasons to reconsider
one's view on dividend ETFs.
For a while, it seemed as though investors had to
go off the beaten path
to discover that their beloved, old school dividend ETFs were
cheating them out of financial services and/or technology
exposure. That is undoubtedly shameful because technology has
contributed to the majority of S&P 500 dividend growth over
the past five years and financial services has been the top
dividend raising sector over the past three.
Better later than never, but fortunately, the mainstream media
is finally catching on. Technology companies in the Standard
& Poor's 500 Index distributed $10.8 billion in dividends in
the most recent quarter, up from $5.1 billion in the same period
in 2010 and tech companies paid a record $11.9 billion in
dividends in the first quarter,
Yes, the average tech company yield is still piddly at just
1.21 percent, but as Bloomberg reports, that is the first time in
at least 15 years it has been above 1 percent.
What that confirms is something the astute have long believed:
The paradigm must be shifted, if even a little bit, to those
dividend ETFs with
decent tech sector exposure
Some investors might say, "Can I just own the Technology
Select Sector SPDR (NYSE:
) for my tech dividend exposure?" Sure, but that is not the best
idea and here's why. XLK is up just over seven percent
year-to-date. Proving that dividends really do work, the First
Trust NASDAQ Technology Dividend Index Fund (NASDAQ:
), which is all of 11 months old, has outpaced XLK by over 500
Ten years ago, it was accurate to say Cisco (NASDAQ:
), Intel (NASDAQ:
) and Microsoft (NASDAQ:
) were not dividend stocks. These days, that trio representing
over 24 percent of TDIV's weight, not only pay dividends, but
they raise those payouts, too.
Reconsider Utilities One of income investors' favorite
destinations in the past decade has been the utilities sector.
Robust yields and low correlations to the broader market have
made made the sector something of a dividend nirvana.
The rush to utilities stocks and ETFs such as the Utilities
Select Sector SPDR (NYSE:
) has also prompted
that are near the high end of the sector's historical
This is how investors should be looking at the tech vs.
utilities dividend trade off: To embrace the latter group, they
will pay more on valuation while likely subjecting themselves to
lower rates of future dividend growth. Yes, nearly three-quarters
of publicly traded utilities boosted payouts last year, but this
year analysts say fewer utility companies are likely to raise
their dividends, and those that do will boost them by smaller
according to the Wall Street Journal
Here is a real world example of how the tech/utilities
trade-off has worked with a pair of dividend ETFs over the past
three years. SDY, the second-largest U.S. dividend ETF, currently
has a 10.1 weight to utilities, by no means the largest among
dividend ETFs, and just a 4.3 percent weight to tech. Over the
past three years, SDY is up 62.1 percent, including paid
That sounds great until learning about the WisdomTree Total
Dividend Fund (NYSE:
). DTD currently has a 13 percent weight to tech, twice the ETF's
weight to utilities. Over the past three years, DTD is up 70
percent while being slightly less volatile than SDY.
For more on ETFs, click
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