For seasoned investors — or at least those who were around to endure the bursting of the technology/Internet bubble earlier this century — the concept of dividend enrichment from the tech sector once seemed as far flung as a flying car. At the height of the first tech bubble, the Nasdaq-100 sported a dividend yield of just half a percent.
Today, the PowerShares QQQ (QQQ), the Nasdaq-100-tracking exchange traded fund, has a trailing 12-month dividend yield of over 1%. And while that may not sound like much, consider this: Six of QQQ’s top 10 holdings are now dividend payers, and at least five are credible dividend growers. That is a testament to dividend growth in the tech sector.
And growing is exactly what tech dividends have been doing. In fact, tech stocks have been one of the primary drivers of S&P 500 payout growth over the past five years. During the first quarter, 36 S&P 500 tech stocks boosted payouts and none lowered dividends, according to FactSet.
Over the trailing three-, five- and 10-year periods, tech dividend growth has soundly outpaced the payout increases found in other sectors. With tech stocks sitting on some of the largest cash piles in corporate America, investors can expect that trend to continue.
Here are a few ETFs with which to play that trend.
First Trust Nasdaq Technology Dividend Index Fund (TDIV)
Dividend Yield: 2.5%
Expense Ratio: 0.5%, or $50 annually for every $10,000 invested
For the investor that wants to go “all in” on technology dividends, there is the First Trust Nasdaq Technology Dividend Index Fund (TDIV), the only ETF explicitly dedicated to the technology dividend theme.
TDIV, which is nearly three years old, requires constituent firms to have a minimum dividend yield of 0.5% for inclusion. The ETF also filters potential dividend cutters by mandating that no companies that have pared payouts in the past year can be included in the fund.
First Trust’s dividend fund allocates more than 8% of its weight to Dow components International Business Machines (IBM), Apple (AAPL) and Microsoft (MSFT). In fact, TDIV has one of the largest weights to Apple among all ETFs that are not traditional tech sector funds.
What makes TDIV potent for income investors is dividend growth potential. IBM has one of the longest dividend increase streaks of any technology, while Apple’s dividend has increased nearly 37% since the iPad maker reinstated its dividend in 2012. Microsoft’s dividend has more than doubled over the past five years.
WisdomTree U.S. Dividend Growth Fund (DGRW)
Dividend Yield: 2%
Expense Ratio: 0.28%
Among more traditional dividend ETFs that have robust tech exposure — a trait that is hard to come by because of the weighting methodologies employed by legacy dividend ETFs — there is the WisdomTree U.S. Dividend Growth Fund (DGRW).
DGRW does not focus on superficial metrics, such as dividend increase streaks. Rather, the ETF evaluates stocks based on growth and value factors.
“The growth factor ranking is based on long-term earnings growth expectations, while the quality factor ranking is based on three year historical averages for return on equity and return on assets,” according to WisdomTree.
WisdomTree U.S. Dividend Growth is not a dedicated tech ETF, but its nearly 20% weight to the sector is massive relative to rival mixed dividend funds. Four of DGRW’s top 10 holdings — Apple, Microsoft, IBM and Intel (INTC) — are tech names.
DGRW has some other advantages. Namely, the ETF features no utilities exposure — good because that sector is this year’s worst performer and vulnerable to rising interest rates. Additionally, DGRW pays a monthly dividend, providing investors with a steadier stream of income than comes with an ETF that delivers quarterly dividends. DGRW charges 0.28% per year.
Schwab U.S. Equity Dividend ETF (SCHD)
Dividend Yield: 2.8%
Expense Ratio: 0.07%
For the cost-conscious investor looking for dividends and tech exposure, the Schwab U.S. Equity Dividend ETF (SCHD) is a perfect destination. SCHD charges a paper-thin 0.07% per year, making it the least expensive dividend ETF in the U.S.
SCHD tracks the Dow Jones U.S. Dividend 100 Index, which not only features some of the largest U.S. dividend payers, but also companies with dividend increase streaks of at least a decade. That gives the ETF, with a yield of 2.8% currently, a tilt toward quality companies.
SCHD’s tech weight is 19.5%, but Apple isn’t a member of the ETF’s lineup because its dividend increase history (and for that matter, its dividend history period) has not reached 10 consecutive years. Microsoft and IBM combine for 7.8% of this fund’s weight.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.