The PowerShares QQQ (NasdaqGS: QQQ), the NASDAQ 100 tracking ETF, jumped 36.6% last year.
While NASDAQ 5,000 and QQQ’s all-time closing high of $117.56 set in late March 2000 are still a long way off, it is unlikely investors that owned QQQ for all of last year are going to quibble with that performance. After all, the ETF returned nearly 37% with hardly any help from Apple (NasdaqGM: AAPL), its largest holding. [Nasdaq Sets Its Sights on 5,000]
It appears the NASDAQ’s evolution and the maturing technology industry have benefited investors. More than half of the Nasdaq 100’s constituents now pay dividends and QQQ has a trailing 12-month yield of just over 1%. That does not sound like much, but back in the NASDAQ’s go-go days of late 1999, the NASDAQ 100’s dividend yield was barely more than a tenth of a percent. [The Changing Face of QQQ]
Investors can play the theme of growing tech dividends with the First Trust NASDAQ Technology Dividend Index Fund (NasdaqGS: TDIV).
“Many of the underlying companies in TDIV are in a more mature phase of their business cycle which allows them to distribute earnings while still seeking long-term growth,” according to FMD Capital.
TDIV holds both NASDAQ and New York Stock Exchange-listed firms and its 12-month distribution yield of 2.43% is considerably higher than that of the NASDAQ 100. Still, some of the NASDAQ’s most prominent names that have recently matured into legitimate dividend stocks are found among TDIV’s 87 holdings.
That roster includes Dow components Intel (NasdaqGM: INTC), Cisco (NasdaqGM: CSCO) and Microsoft (NasdaqGM: MSFT). TDIV gained 23.1% last despite, like QQQ, getting little help from Apple and being home to International Business Machines (NYSE: IBM), one of the Dow’s worst performers in 2013. IBM and Apple combine for almost 16% of TDIV’s weight. TDIV offers another advantage.
Tech companies “have low debt ratios and offer exposure to businesses that aren’t as susceptible to interest rate risk as utilities or telecommunications stocks,” according to FMD Capital. Historically, tech is one of the top-performing sectors when interest rates rise. [Some Dividend ETFs Stand Firm as Rates Rise]
There is more to the tech dividend story. Investors have shown a willingness to pay up for expensive defensive sectors such as consumer staples and utilities because of past dividend growth from some of those companies, but the phenomenon of tech dividend growth is still new. That means some investors still may not realize the potential for substantial dividend growth from the tech sector going forward.
For example, in 2013, the average dividend increase by Apple, Cisco, Microsoft and IBM was 17.6%.
“Historically, for example, technology companies have been associated with reinvesting the bulk of their profits into their businesses to finance future growth, but more recently, some have favored share buybacks, dividend initiation or dividend increases. Since this trend in technology stocks is fairly recent (Cisco just began paying in 2011, for instance, and Apple in 2012), backward-looking dividend growth screens with five-, ten- or twenty-year periods may not fully capture these dividend initiations or increases,” said WisdomTree Research Director Jeremy Schwartz in a note published in October 2013.
First Trust NASDAQ Technology Dividend Index Fund
Tom Lydon’s clients own shares of Apple, Cisco, Microsoft and QQQ.