Many investors know that dividends have become increasingly popular in the last couple of years under the weight of diminished expectations for equity market growth. There are certain sectors of the market, like utilities, that can be relied upon for dividends.
Technology has not been one of those sectors until recently. Now, however, investors can access tech dividends in the ETF space through the First Trust Nasdaq Technology Index Fund (TDIV).
The fund is probably best compared to the Technology Sector SPDR (XLK) because both funds own mostly technology stocks with a small percentage in telecom stocks. TDIV actually targets 80 per cent in tech stocks and 20 per cent in telecom.
The methodology underlying the fund builds a universe of stocks that have a market cap of at least $500-million, yield at least 0.5 per cent, have not cut their dividend and have a minimum trading volume. The next step is to weight the stocks in this universe by market, not dividend yield, so the largest holdings are very familiar names like Qualcom, Microsoft, IBM, Intel and Cisco, which all have about a 7 per cent target weight in the fund.
Of those five stocks only Intel has had a yield above 3 per cent, Cisco just increased its dividend and it now should be 3 per cent, so it was surprising to hear from First Trust that the index yield is currently “just above 3 per cent” but after a closer review it looks like much of the yield will be attributed to telecom stocks like Vodaphone, AT&T, Century Link and Verizon, along with some other high yielding telecom stocks. Like utilities, telecom is also a good source for yield.
The above telecom stocks only have 2 per cent weightings in the fund but their yields range from 4.5 per cent to 6.8 per cent and there are some other telecom stocks in the fund that have similarly high yields.
The expense ratio for TDIV is 0.50 per cent so an index yield of close to 3 per cent would imply that the fund will yield 2.5 per cent. But, as is the case with any new ETF, there can be no certainty of what the actual yield will be.
The biggest point of differentiation between TDIV and XLK would be TDIV having no exposure to Apple (AAPL) vs. 19 per cent for XLK. To be included in TDIV a stock must have paid a dividend for at least one year. Apple only started paying dividends this month so it would seem that Apple would be added to TDIV at the first rebalancing after one year of dividends.
Based on the current makeup of the fund it would seem that if Apple does get added it would have a 7 per cent weight. That is still much less than 19 per cent of course but still enough to influence TDIV’s results when the time comes.
Investors should not lose sight of the notion that dividends are now very popular and popular is not always good where investing is concerned. It is not worthwhile to try to predict when or if dividend stocks will start to do poorly so much as continually monitoring dividend based holdings for signs of starting to do poorly.