Technology stocks are usually associated with high-growth companies that need to reinvest every spare penny of capital back into their businesses. Recently, many larger tech companies have started boosting their dividends, as their technologies become ...and more »
Technology stocks are usually associated with high-growth companies that need to reinvest every spare penny of capital back into their businesses. Recently, many larger tech companies have started boosting their dividends, as their technologies become more mature and investors look for greater security from their holdings. One exchange-traded fund has sought to capitalize on this trend by emphasizing technology dividend stocks, and the ETF does have a higher yield than its peers. Yet some question whether the boost in income is really worth higher costs. Looking at the following five technology ETFs, you can judge for yourself whether the specialty technology dividend ETF among them is the right pick for income investors.
Assets Under Management
First Trust Nasdaq Technology Dividend (NASDAQ:TDIV)
Technology Select Sector SPDR (NYSEMKT:XLK)
Vanguard Information Technology (NYSEMKT:VGT)
First Trust Dow Jones Internet (NYSEMKT:FDN)
iShares U.S. Technology (NYSEMKT:IYW)
Data source: Fund providers.
The technology dividend ETF niche
You'll find only a single ETF that specifically specializes in technology stocks that pay dividends. The First Trust technology dividend ETF focuses on technology stocks that have a market cap of at least $500 million. The company must have paid a regular dividend within the past 12 months, have a yield of at least 0.5%, and not have decreased its dividend within the past year. The ETF uses a methodology that weights holdings based on the dividends that they pay. Telecom stocks get 20% of the overall assets of the fund, while technology stocks split the other 80%.
The result of this methodology is that the First Trust technology dividend ETF has about 40% of its portfolio invested in just five stocks. Those five tech giants also happen to be the five pure technology stocks that are components of the Dow Jones Industrials. With yields ranging from 1.75% to nearly 4%, these major holdings of the technology dividend ETF go a long way toward producing its high yield of nearly 3%.
Image source: Getty Images.
Is a technology dividend ETF worth it?
One key to deciding whether niche ETFs make sense is to compare them with more mainstream, broad-based funds. With mature technology stocks having generally boosted their dividends lately, it might be sufficient to invest in lower-cost tech sector ETFs that don't specifically highlight dividend payments as a basis for stock selection.
When you look at the yields that general purpose technology ETFs pay, however, you'll see that they don't really stand up well. The largest fund in the space, the SPDR tech ETF, has a dividend yield that's just more than half what the First Trust ETF pays. The other broad-based ETFs from Vanguard and iShares do an even poorer job of generating dividend income, with yields hovering closer to 1%.
Some subsectors of the technology industry are notorious for not paying dividends at all. Internet-based companies are generally younger than their PC-reliant counterparts, and their youth leaves them in a position in which they have to reinvest more of their cash flow back into growing their businesses. It's therefore no surprise to see that the First Trust Internet ETF has no yield currently and hasn't made a distribution since 2011.
What's right for you?
What matters in deciding whether a technology dividend ETF belongs in your portfolio is how you think about investing in the space. The idea of a technology dividend ETF is almost an oxymoron in some investors' minds, because many people seek out tech stocks specifically because they emphasize growth over more conservative factors like value or dividends. They're happy not getting any dividend at all as long as they see stock-price appreciation produce life-changing returns.
As the technology sector ages, more tech stocks will leave their high-growth phases and join the more mature parts of the market. A greater emphasis on dividends will naturally follow, and for income investors looking for growth prospects as well as reliable income, looking at the tech sector will offer the best of both worlds. Those investors will be willing to pay slightly more in expenses to get tailored exposure to the tech stocks that best fit their dual goals of long-term returns and current dividend income.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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