To Tech For Dividends

For years, dividend investors and the related exchange traded funds (ETFs) largely glossed over the technology sector. It is easy to understand why. Look at the tech-heavy Nasdaq-100 Index. That index allocates almost 45% of its weight to technology stocks and has a dividend yield of just 0.80%.

Many dividend ETFs, particularly those that use dividend increase streaks as part of their methodologies, lack tech exposure. For example, the S&P 500 Dividend Aristocrats Index, which requires member firms to have boosted payouts for at least 20 consecutive years, allocates just 1.95% of its weight to tech compared to an almost 22% weight to tech in the S&P 500.

While tech may never be a high-yield sector on par with real estate or utilities, data confirm tech's dividend profile is increasing. The $1 billion First Trust Nasdaq Technology Dividend Index Fund (TDIV) is an ETF dedicated to dividend payers in the tech sector.

TDIV, which turns seven years old in August, tracks the Nasdaq Technology Dividend Index. That benchmark can allocate up to 20% of its weight to telecommunications stocks, but today, companies classified as diversified telecom providers represent just over 12% of TDIV's weight.

Other qualifiers for the Nasdaq Technology Dividend Index mandate that components have paid a dividend over the past 12 years, yield at least 0.50% and have not cut their payouts over the past year.

Positive Trajectories

Tech behemoths such as Apple Inc. (AAPL) and Microsoft Corp. (MSFT) are currently excluded from some well-known dividend ETFs for the simple reason that these companies have not boosted pays for enough consecutive years, but the trajectory of tech dividends is undoubtedly positive. Along with being voracious buyers of their own shares, tech companies have shown a willingness to spend cash on dividend increases.

“Tech giants spent a combined $50 billion on dividends last year. Dividend growth was one percentage point higher than the previous year, but smaller than the acceleration in 2016,” according to Bloomberg.

While tech is often painted as a low-yield sector, the Nasdaq Technology Dividend Index had a dividend yield of 3.17% at the end of the first quarter. That is more than double the 1.34% dividend yield on the S&P 500 Technology Index.

A decade ago, there were no tech stocks with dividend increase streaks ranging from five to 25 years. At the end of last year, there 50, including 13 with dividend increase streaks of 10 years to 24 years. Importantly, many of TDIV's holdings have the capability to continue raising payouts. Apple and Microsoft, which combine for almost 17% of the fund's weight, have $245 billion and $133.76 billion in cash, respectively.

Apple is scheduled to report earnings on April 30 and some analysts are forecasting up to a 10% dividend increase and additions to the company's already sizable buyback program.

Bottom Line

Given the cash positions of many TDIV components, it is reasonable to expect payouts will continue growing among the fund's member firms.

The fund remains a practical option for conservative, income-minded investors seeking tech exposure as long as those investors know what they are getting before embracing TDIV. TDIV's dominant holdings are mostly older, more mature tech companies and because they are not yet dividend payers, popular e-commerce, Internet and social media companies do not reside in this ETF.

Differences in terms of holdings mean differences in terms of total returns as highlighted by TDIV trailing the Nasdaq-100 by nearly 1,200 basis points over the past three years. To its credit, TDIV was 280 basis points less volatile than the Nasdaq-100 during that period.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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