Tech Dividends: A Closer Look at TDV and TDIV ETFs

Key Points

• Technology is quietly becoming a significant player in the dividend arena.
• The tech sector’s cash reserves suggest substantial potential for long-term dividend growth.
• ETFs offer a convenient way to navigate the complex landscape of tech dividend stocks.

The notion of technology and dividends as a pair might not immediately spring to mind for many investors, but there’s more to this combination than meets the eye.

Seasoned dividend investors often gravitate towards sectors like consumer staples, healthcare, and utilities when discussing their preferred dividend sources. The technology sector, however, rarely features in these conversations.

This oversight is understandable, given that the largest ETF tracking the tech-heavy Nasdaq-100 Index boasts a mere 12-month distribution rate of 0.48%. While this figure may not seem impressive at first glance, it belies the technology sector’s emerging status as a hub for dividend growth. In fact, Gate’s data reveals that tech giants like Microsoft and Apple rank among the top dividend payers in the S&P 500 in terms of absolute dollar amounts.

While Microsoft and Apple are widely recognized names, they represent just the tip of the iceberg in the tech dividend landscape. For investors seeking a more comprehensive exposure to this trend, the First Trust NASDAQ Technology Dividend Index Fund and the ProShares S&P Technology Dividend Aristocrats ETF offer intriguing options.

Despite their similar tickers, these ETFs employ distinct methodologies. Let’s delve into how each fund approaches the tech dividend theme.

TDV: A Time-Tested Approach

The ProShares S&P Technology Dividend Aristocrats ETF, as its name suggests, draws inspiration from the Dividend Aristocrats concept. TDV tracks the S&P Technology Dividend Aristocrats – a collection of tech companies that have consistently increased their dividends for at least seven consecutive years.

Given the relatively recent marriage of tech and dividends, this index requirement might seem restrictive. However, TDV manages to include 38 stocks in its portfolio. This diversity is achieved through the index’s flexible definition of “tech-related” companies, which allows for the inclusion of firms like Mastercard and Visa.

One potential drawback of TDV’s methodology is that the dividend increase streak requirement excludes some prominent names from the index. For instance, while Alphabet and Nvidia pay dividends, they haven’t met the seven-year consecutive increase criterion, rendering them ineligible for TDV inclusion.

Nevertheless, TDV offers several advantages, including its equal-weighting approach to holdings. This strategy allows the ETF to serve as an income-generating complement to market cap-weighted tech funds, which often concentrate a significant portion of their portfolios in a handful of stocks.

TDIV: A Flexible Tech Dividend Approach

While TDV’s dividend increase streak mandate evokes an exclusive club membership, the First Trust NASDAQ Technology Dividend Index Fund has its own set of stringent criteria. TDIV follows the Nasdaq Technology Dividend™ Index, which imposes several rules that dividend investors should be aware of. These include requiring member firms to have paid a dividend over the past year, maintained or increased their payout during that period, and offer a minimum yield of 0.50%.

By forgoing the consecutive payout increase requirement, TDIV boasts a significantly larger portfolio of 94 holdings. Another key difference lies in TDIV’s weighting methodology. The ETF’s index employs a dividend value-weighted approach, which places greater emphasis on stocks with substantial dividends and large market capitalizations. As a result, companies like Broadcom, Oracle, and Microsoft collectively account for nearly a quarter of the ETF’s weight. While TDIV’s approach differs from its competitor, its performance since its August 2012 inception speaks for itself.

TDIV also distinguishes itself through its ability to include international stocks, some of which have contributed positively to performance, and its allocation of up to 20% of its portfolio to communication services stocks. This latter point is particularly relevant, as it opens the door for potential inclusion of companies like Alphabet and Meta Platforms, should they increase their dividends sufficiently to meet the 0.50% yield threshold.

Choosing the Right Tech Dividend ETF

Cost-conscious investors may find TDV appealing due to its lower annual expense ratio of 0.45% compared to TDIV’s 0.50%. However, savvy investors recognize that fees are just one aspect of the equation.

The ProShares ETF may be more suitable for investors seeking proven dividend reliability through an instrument that currently leans towards mature, established technology companies. Additionally, the fund’s equal-weight methodology may be attractive in an environment where many cap-weighted indexes are heavily concentrated in a small number of stocks.

Conversely, TDIV might be the preferred choice for growth-oriented investors looking to incorporate an income component into their portfolios. While past performance doesn’t guarantee future results, it’s worth noting that over the past three years, TDIV has demonstrated competitive returns and volatility characteristics compared to traditional tech ETFs, suggesting that its flexibility and index construction have worked in investors’ favor.