As tech dividends rise, ETF outpaces key holdings

This one-year-old technology fund has been in the right place at the right time.

By Benzinga Aug 7, 2013 2:47PM

An old knock on ETFs is that rarely, if ever, do equity-based funds outperform the best-performing stock in their lineups.

Then again, stock ETFs rarely perform as poorly as the worst stocks on their rosters. For investors, finding an ETF that delivers better returns than a fair amount of its top holdings is a good thing.

It is even better when that ETF is devoted to one of the best sectors for future dividend growth: technology. Say an early happy first birthday to the First Trust NASDAQ Technology Dividend Index Fund (TDIV), which turns one next Tuesday.

TDIV is a prime example of a new ETF that has been in the right place at the right time. While tech, broadly speaking has been laggard sector this year, tech stocks continue to bolster their dividend footprints. In the first quarter, technology led the S&P 500 in terms of dividend growth for the second consecutive quarter, according to FactSet data.

Growth in tech sector dividends has been fueled in part by Apple (AAPL) initiating a payout, then announcing a significant increase to that payout earlier this year. Cisco (CSCO) announced a 75% increase to its dividend last year.

Tech is now the largest dividend-paying sector in the U.S. As for TDIV, Cisco is that ETF's largest holding and Apple is second. The two combine for nearly 17% of the ETF's weight. TDIV, which excludes companies that have cut or suspended their payouts, is up 14.1% this year, easily trouncing the 8.3% gain for the Technology Select Sector SPDR (XLK).

TDIV is also outpacing plenty of its marquee holdings, including Apple. Proving TDIV offers something for conservative investors, the fund has 20% allocation to telecom names. That means Windstream (WIN) is the ETF's 10th-largest holding.

Excluding Windstream, TDIV's other top-10 holdings are all pure tech stocks. Of that group of nine, only Cisco, Hewlett-Packard (HPQ), Texas Instruments (TXN) and Microsoft (MSFT) have outperformed TDIV this year.

Given that from 1998 through 2011 HP did not raise its dividend, it is not unreasonable to say investors that wanted tech exposure and dividend growth would have avoided that stock, at least until last year. Legitimate dividend growers in the tech space would certainly include International Business Machines (IBM), Intel (INTC) and Microsoft. IBM is slightly lower this year and TDIV is nearly 400 basis points ahead of Intel.

Oracle (ORCL) and Qualcomm (QCOM) also rank among the TDIV top-10 holdings that have lagged the ETF. Voracious repurchasers of their own shares, Oracle and Qualcomm have also been outpaced (Benzinga) by the PowerShares Buyback Achievers Portfolio (PKW).

As for telecom, TDIV devotes a combined 10.2% of its weight to Windstream, CenturyLink (CTL), Vodafone (VOD), Verizon (VZ) and AT&T (T). Only Verizon and Vodafone of that group have delivered year-to-date returns that are superior to TDIV. Translation: Only five of TDIV's 14 holdings have been better than the ETF this year.

In terms of number of S&P 500 members that yield 2% or more, tech is in the middle of the road, trailing financial, discretionary, industrials and utilities. However, tech had a five-year dividend growth average of 12% in the first quarter, double that of the S&P 500, according to Loomis Sayles data. That indicates TDIV's days of out-performance could just be getting started.

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