Olly thinks that dividend ETFs may potentially be misleading
investors, since they tend to be underweight areas like technology
and energy, making their portfolios less diversified.
I couldn't disagree more.
First of all, dividend ETFs make no claims to be broad market
ETFs. They are, instead, focused on historically
These aren't tiny portfolios, either. The Vanguard High Dividend
Yield ETF (NYSEArca:VYM) holds 439 securities and the WisdomTree
Equity Income ETF (NYSEArca:DHS) holds 347. The number of holdings
obviously doesn't tell the whole story, but with the top holding
coming in at 6.5 percent for VYM and 7.8 percent for DHS, it's hard
to argue that these are highly concentrated funds.
It's probably fair to say that if you're interested in
technology companies, a dividend ETF in isolation might not be the
right ETF for you.
VYM has a higher concentration of technology companies than any
of its peers, but still comes in with a mere 8.3 percent-less than
half of SPY's 18.4 percent allocation to tech.
On the low side, Russell's new ETFs-the Russell High Dividend
Yield ETF (NYSEArca:HDIV) and the Russell Small Cap High Dividend
Yield ETF (NYSEArca:DIVS)-allocate 1 percent and 0.6 percent of
their portfolios, respectively, to technology.
But I don't generally think of technology companies when I think
of high dividends. If you're interested in technology, there are 10
ETFs that focus strictly on U.S. technology companies-you'll have
better luck finding what you want there.
According to economic theory, it only makes sense to pay
dividends if a company can't figure out anything better to do with
its cash. Fast-growing technology companies, thus, are more likely
to invest their excess cash in more growth opportunities.
Apple made a big splash when it announced its $2.65 quarterly
dividend, but with a handle close to $600, that's a 1.8 percent
dividend yield. In comparison, companies like AT&T and General
Electric have historical dividend yields of 5.6 percent and 3.4
Although Apple's dividend is certainly high enough to warrant
its inclusion in dividend-focused funds, it likely won't appear in
any for at least a year. That's because most dividend indexes
require at least a year of consistent dividend payment, and some
require an even longer history.
We can look at the historical dividend yields of the sector SPDR
funds to further make my point:
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