Further Proof You're Buying The Wrong Dividend ETFs

There are a few certainties when it comes to dividend ETFs. First, investors like these funds. A lot. Inflows data says as much.

For example, the Vanguard Dividend Appreciation ETF VIG, the largest U.S. dividend ETF by assets, is among the top-10 asset-gathering ETFs. That is ALL U.S. ETFs. The SPDR S&P Dividend ETF SDY has not been a slouch either in terms of year-to-date inflows with over $1.1 billion.

Another certainty is that by embracing many of the most popular dividend ETFs, investors are committing to a fund that is A) Likely heavy on staples and utilities stocks and B) Probably light on financial services and technology stocks. It is not that the "old school" dividend ETFs are bad. They are not, but there are good reasons to reconsider one's view on dividend ETFs.

For a while, it seemed as though investors had to go off the beaten path to discover that their beloved, old school dividend ETFs were cheating them out of financial services and/or technology exposure. That is undoubtedly shameful because technology has contributed to the majority of S&P 500 dividend growth over the past five years and financial services has been the top dividend raising sector over the past three.

Better later than never, but fortunately, the mainstream media is finally catching on. Technology companies in the Standard & Poor's 500 Index distributed $10.8 billion in dividends in the most recent quarter, up from $5.1 billion in the same period in 2010 and tech companies paid a record $11.9 billion in dividends in the first quarter, Bloomberg reported.

Yes, the average tech company yield is still piddly at just 1.21 percent, but as Bloomberg reports, that is the first time in at least 15 years it has been above 1 percent.

What that confirms is something the astute have long believed: The paradigm must be shifted, if even a little bit, to those dividend ETFs with decent tech sector exposure.

Some investors might say, "Can I just own the Technology Select Sector SPDR XLK for my tech dividend exposure?" Sure, but that is not the best idea and here's why. XLK is up just over seven percent year-to-date. Proving that dividends really do work, the First Trust NASDAQ Technology Dividend Index Fund TDIV, which is all of 11 months old, has outpaced XLK by over 500 basis points.

Ten years ago, it was accurate to say Cisco CSCO, Intel INTC and Microsoft MSFT were not dividend stocks. These days, that trio representing over 24 percent of TDIV's weight, not only pay dividends, but they raise those payouts, too.

Reconsider Utilities
One of income investors' favorite destinations in the past decade has been the utilities sector. Robust yields and low correlations to the broader market have made made the sector something of a dividend nirvana.

The rush to utilities stocks and ETFs such as the Utilities Select Sector SPDR XLU has also prompted frothy valuations that are near the high end of the sector's historical average.

This is how investors should be looking at the tech vs. utilities dividend trade off: To embrace the latter group, they will pay more on valuation while likely subjecting themselves to lower rates of future dividend growth. Yes, nearly three-quarters of publicly traded utilities boosted payouts last year, but this year analysts say fewer utility companies are likely to raise their dividends, and those that do will boost them by smaller amounts, according to the Wall Street Journal.

Here is a real world example of how the tech/utilities trade-off has worked with a pair of dividend ETFs over the past three years. SDY, the second-largest U.S. dividend ETF, currently has a 10.1 weight to utilities, by no means the largest among dividend ETFs, and just a 4.3 percent weight to tech. Over the past three years, SDY is up 62.1 percent, including paid dividends.

That sounds great until learning about the WisdomTree Total Dividend Fund DTD. DTD currently has a 13 percent weight to tech, twice the ETF's weight to utilities. Over the past three years, DTD is up 70 percent while being slightly less volatile than SDY.

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