A Dividend ETF With A Conservative Approach To Tech

Coming out of the technology bubble of 2000, the technology sector wasn't known for its income-generating capabilities. Over the past decade, technology's contribution to S&P 500 dividend growth has been significant.

Over the past several years, the sector has been one of the biggest contributors rising payouts and share buybacks in the U.S. However, not all dividend exchange traded funds reflect technology's growing prominence in the domestic dividend landscape.

What Happened

The WisdomTree U.S. Quality Dividend Growth Fund DGRW, which is over five years old, was one of the first dividend ETFs to prominently feature technology stocks. Today, tech is DGRW's largest sector exposure at 22.12 percent, or nearly 300 basis points more than the fund allocates to healthcare stocks.

“Many of today’s large tech companies are rewarding shareholders in the form of massive dividend and share buyback programs, earning their way into fundamentally weighted indexes,” said WisdomTree in a recent note. “However, as has been highlighted by some of the tech-driven sell-offs of 2018, these companies are a disparate group, with vastly different fundamental and technical characteristics.”

Why It's Important

As has been widely documented, a small number of stocks, including the FAANG quintet, have been driving the S&P 500 this year. Of the five FAANG stocks, Apple Inc. AAPL is the only one that currently pays a dividend. The iPhone maker is 4.7 percent of DGRW's weight and the fund's third-largest holding.

The $2.34 billion DGRW tracks the WisdomTree U.S. Quality Dividend Growth Index.

“Since its inception, the WisdomTree Index has been near market weight in the Information Technology sector and over-weight in the Consumer Discretionary sector, despite never owning the FAANG (Facebook, Apple, Amazon, Netflix, Google) stocks that have never paid a dividend (Apple began its dividend payout in 2012),” according to WisdomTree.

What's Next

Depending on the time frame, there are periods when DGRW's lack of FAANG exposure is a headwind. Over the past three years, the ETF has lagged the FAANG-heavy Nasdaq-100 Index, but the dividend topped the S&P 500 over the same period.

DGRW's underlying index methodology “seeks to reward companies with attractive valuations and be under-weight in those that lag their peers,” said WisdomTree. “For investors concerned about certain tech companies’ performance beginning to outpace fundamentals, we would encourage them to consider a focus on quality dividend payers to mitigate valuation risks.”

Disclosure: The author owns shares of DGRW.

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