Credit: Shutterstock photoTechnology companies have always been known as growth engines that continually reinvest their profits into new cutting-edge features, products or services that they believe will increase value for shareholders. However, a common trend among several mega-cap tech stocks is to also reward shareholders through share buybacks and returning cash in the form of dividends.
I have endearingly labeled these companies the "technology value sector" which typically represents larger, established names with strong balance sheets and low debt ratios. This stocks such as Apple Inc (AAPL), Microsoft Corporation (MSFT), CISCO Systems (CSCO) and Intel Corporation (INTC).
Many of these companies have more cash than they know what to do with, which is why they are starting to return their profits to shareholders. This in turn creates a better value proposition for owning the stock and boosts investor demand.
This value proposition for technology stocks will directly benefit dividend-oriented exchange-traded funds such as the First Trust NASDAQ Technology Dividend Index Fund (TDIV). This ETF includes nearly 100 dividend paying companies in the technology and telecommunications industries that have declared a distribution in the last 12 months.
The index that TDIV is based off uses a modified dividend weighting methodology to determine the allocation of the underlying holdings. The current 30-day SEC yield on TDIV is 2.61%, which doesn't seem significant until you compare it to the Technology Select Sector SPDR (XLK) that is paying a yield of only 1.29%. Income is paid quarterly to shareholders as is the case with most traditional equity income funds.
The top 3 holdings in TDIV include the aforementioned INTC, MSFT, and AAPL. Together those three stocks make up one quarter of the overall asset allocation. The fund charges an expense ratio of 0.50% to implement this strategy as well.
The performance comparison between TDIV and diversified dividend stock indexes is also a very compelling factor for investors to consider. The total one-year return of TDIV is +18.69% compared to +7.85% for the more broadly focused iShares Select Dividend ETF (DVY) through June 18, 2018. DVY only has an approximate 5.97% allocation to technology and telecommunication stocks, although its 3.37% yield is quite a bit higher.
It is important to note that TDIV is still a highly concentrated sector position and therefore should be evaluated within that context. It will most likely not take the place of a core position in your portfolio such as DVY, which has a much more diversified dividend makeup. In addition, TDIV has more exposure to small and mid-cap companies than the large-cap weighted XLK, which may offer investors more balanced exposure to the technology sector.
I would expect that as the holdings within TDIV are analyzed on a quarterly basis that new stocks will appear based on this shift in strategy towards cash distributions. Two companies that are often rumored to eventually boost cash returns to shareholders are Google Inc. (GOOG) and Visa Inc. (V). Neither of which are currently represented in this technology dividend index.
The Bottom Line
ETF Investors are still hungrily seeking out equity income funds for their portfolio as they balance the need for capital appreciation with income generating opportunities. TDIV may represent an opportunity for both growth and income investors that are seeking to overweight their stock holdings towards this value-oriented theme.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
