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TDIV: Is The Tech Dividend Boom About To End?

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Investment Thesis

The First Trust NASDAQ Technology Dividend Index Fund (NASDAQ:TDIV) was designed to complement dividend portfolios that are usually ray connected Technology stocks. TDIV's estimated 2% output won't move heads, but nan transportation is that nan Technology assemblage is nan maturation leader for dividends. You tin usage it to create a diversified income portfolio pinch nan anticipation of important superior gains.

The rumor is that beardown income and net maturation must support dividend growth, and that's not nan anticipation today. My study reveals a meager 6% estimated income and net maturation complaint complete nan adjacent 12 months, hardly capable to support nan double-digit dividend maturation to make TDIV worthy buying. In addition, TDIV's holdings person anemic net momentum, mediocre sentiment connected Wall Street, and waste and acquisition astatine a comparatively precocious valuation for a dividend fund. These factors request to improve, and while I like nan wide conception of a tech-focused dividend fund, nan numbers don't work, truthful I urge readers debar TDIV stock.

TDIV Overview

Strategy and Key Exposures

TDIV tracks nan Nasdaq Technology Dividend Index, selecting up to 100 Technology and Telecommunications companies that salary regular dividends. Eligible companies database connected nan Nasdaq Stock Market, nan NYSE, nan NYSE American, aliases nan CBOE Exchange but don't request to beryllium headquartered successful nan United States. Foreign equities relationship for astir 16% of nan portfolio, pinch Taiwan Semiconductor Manufacturing (TSM) arsenic nan astir prominent. Other eligibility requirements see nan following:

  • $500 cardinal minimum marketplace capitalization
  • $1 cardinal three-month mean regular traded value
  • paid a regular aliases communal dividend wrong nan past 12 months
  • no dividend alteration wrong nan past 12 months
  • 0.5% minimum dividend yield

Index reconstitutions hap successful March and September. I don't expect galore meaningful changes this period since astir apical holdings for illustration Broadcom (AVGO) and Apple (AAPL) proceed to summation dividend payments. Still, respective overseas equities look to person their dividend streaks interrupted. For example, TSM's dividend streak ended this year, contributing to a mediocre "C-" Dividend Consistency Grade.

TSM Dividend Consistency Grade

Seeking Alpha

While technically accurate, nan logic for nan interruption is fluctuating speech rates. TSM's investor relations page confirms nan unchangeable NT$2.75 quarterly dividend payment.

TSM Dividend History

Taiwan Semiconductor Manufacturing: Investor Relations

TDIV follows a modified dividend-dollar weighting scheme, meaning a company's first Index weight is wished by nan merchandise of their dividends per stock and full shares outstanding. WisdomTree follows a akin process for its U.S. home dividend ETFs, and I see it a transverse betwixt a yield-weighted and a market-cap-weighted approach. In addition, nan Index must meet nan pursuing criteria astatine each rebalancing:

  1. Technology and Telecom sectors person 80% and 20% weightings
  2. Maximum 8% Technology information weight
  3. Maximum 5 Technology securities pinch weights supra 4%
  4. Maximum 2% Telecom information weight

Finally, First Trust provides immoderate further adjuvant statistics. Broadcom, Apple, and Microsoft (MSFT) are nan apical 3 holdings, pinch nan apical 10 accounting for 57% of nan portfolio. There are 93 full holdings, a 0.04% median bid-ask spread, but a hefty 0.50% disbursal ratio. This interest is disappointing and contrary to nan objectives of dividend investors since it straight impacts your distributions. TDIV's constituents presently output a weighted mean of 2.50%, but investors will nett astir 2% aft fees. That needs to beryllium higher, particularly pinch questionable dividend growth.

TDIV Current Fund Data and Top Ten Holdings

First Trust

Performance History

The pursuing chart compares TDIV's capacity against nan Technology Select Sector SPDR ETF (XLK) and nan Invesco S&P 500 Equal Weight Technology ETF (RYT) since September 2012. TDIV gained an annualized 12.08%, astir 5% per twelvemonth little than these lower-yielding peers. It's an absorbing proposition. TDIV shareholders want vulnerability to high-growth companies successful nan Technology sector, but nan astir promising ones don't salary precocious dividends. The ones that do, for illustration International Business Machines (IBM) and, until recently, Intel (INTC), are bequest tech companies whose precocious maturation days are down them.

TDIV vs. XLK vs. RYT Performance

Portfolio Visualizer

The pursuing array highlights nan yearly income generated connected a $10,000 finance successful January 2013. Ten years later, TDIV's yearly income is $784 vs. $515 and $345 for XLK and RYT. This maturation complaint is astir 10% for each 3 but has declined to 6% complete nan past 5 years. Dividend maturation successful nan assemblage isn't what it utilized to be, which leads nicely into my adjacent point: nan erstwhile reasons to bargain TDIV don't use anymore.

TDIV vs. XLK vs. RYT Portfolio Income Growth

Portfolio Visualizer

TDIV: Previous Reasons To Own Don't Apply

First Trust was an early mover successful buying Technology stocks for their dividends. On nan surface, it's overseas because we deliberation of this assemblage arsenic fast-growing. It's inefficient to administer payments to shareholders when, by reinvesting profits, a institution could make a higher return connected equity that will yet show up successful nan stock price. However, astir dividend ETFs are ray connected Technology stocks. For example, nan ProShares S&P 500 Dividend Aristocrats ETF (NOBL) only has astir 5% exposure. High-yielding costs for illustration nan iShares Core High Dividend ETF (HDV) are person to 10%, and that's reflected successful comparatively mediocre humanities returns. In contrast, ETFs that didn't shun nan sector, for illustration VIG, SCHD, and RDVY, were nan astir successful complete nan past decade.

TDIV is aimed astatine high-yield investors wanting amended assemblage diversification. However, dividend maturation is nan attraction alternatively than yield. Consider this research report prepared for nan Index successful December 2016, noting that nan Technology assemblage accrued cumulative dividends by 316% successful nan preceding decade.

Building The Case For The Technology Sector As A Dividend Play

Nasdaq

In different words, dividend payments whitethorn beryllium mini today, but they'll accumulate quickly and yet go a important portion of your income. It's logical, but there's 1 important problem. Strong income and net maturation should ever support dividend growth, and that's not nan lawsuit anymore. One-year estimated income and net maturation rates for TDIV's existent holdings are astir 6%, hardly nan double-digit maturation they had complete nan past 3-5 years. Vanguard's projections besides bespeak maturation stocks will underperform complete nan adjacent decade. Assuming institution guidance makes prudent decisions, TDIV shareholders won't person nan expected accelerated dividend growth. That's nan threat of relying heavy connected humanities information. If conditions change, nan cardinal reasons to bargain mightiness not beryllium anymore.

TDIV Fundamentals

TDIV has different headwind: mediocre net momentum. Last quarter, constituents missed net expectations by 1.11% connected a weighted-average basis. Yardeni Research reports really large-cap Technology and Communication Services stocks amazed by 1.1% and -7.2% successful aggregate past quarter. These figures are nan worst successful complete a decade, indicating history is improbable to repeat. These metrics and others are presented successful nan array beneath for TDIV's apical 25 holdings alongside nan ProShares S&P Technology Dividend Aristocrats ETF (TDV), a money pinch akin objectives worthy considering.

TDIV vs. TDV Fundamentals Comparison

The Sunday Investor

As mentioned, TDIV's 6.15% and 5.57% estimated income and net maturation rates can't support nan 11.02% dividend maturation its constituents knowledgeable complete nan past 3 years. The aforesaid is existent for TDV, though its maturation rates are marginally better. I discussed akin maturation problems successful my January review erstwhile I downgraded nan ETF to a hold.

However, TDIV's business is much challenging. Its 4.06/10 EPS Revision Score, derived from individual Seeking Alpha Factor Grades, indicates analysts are bearish connected nan portfolio. There are a fewer good-news stories from past quarter, but you person to scan down nan database earlier seeing a double-digit net surprise. Analog Devices (ADI) and Rogers Communications (RCI) are standouts, each pinch coagulated EPS Revision Scores and affirmative net surprises past quarter. Still, their Index weights are negligible. TDIV, owed to its weighting scheme, is controlled by poor-performing stocks for illustration Apple, Microsoft, and Intel, nan second of which is down 45% successful nan past year. It's a risky play, and nan 2% dividend output isn't worthy it. Furthermore, TDIV and TDV waste and acquisition astatine 21-22x guardant earnings, which is comparatively costly for a dividend ETF.

Investment Recommendation

TDIV was created because nan Technology assemblage knowledgeable tremendous dividend maturation complete nan past 10-15 years, supported by equally-impressive income and net growth. However, analysts expect income and net maturation to slow to 6% complete nan adjacent year, and Vanguard expects maturation stocks to underperform complete nan adjacent decade. Therefore, it's unreasonable to judge TDIV will turn dividends astatine a complaint capable adequate to complement its estimated 2% dividend yield. Furthermore, TDIV has mediocre net momentum and trades astatine 21.3x guardant earnings, indicating nan ETF is astatine risk.

I for illustration nan conception of diversifying dividend portfolios pinch dedicated Technology dividend costs for illustration TDIV and TDV, but nan timing could beryllium amended correct now. The outlook for nan assemblage needs improvement, and that starts pinch value net reports. Since we're not location yet, I don't urge buying TDIV. Thank you for reading, and I look guardant to discussing this further successful nan comments conception below.

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