TDV: A Dividend Spin On Tech

Assuming the Fed is done hiking rates, 2024 may end up being the year of dividend investing. If that’s the case, and you’re still bullish on Technology, the ProShares S&P Technology Dividend Aristocrats ETF (BATS:TDV) may be the fund for you. TDV offers exposure to a select group of technology-related companies that have consistently increased their dividends for at least seven consecutive years. Launched on November 5, 2019, the ETF tracks the S&P Technology Dividend Aristocrats Index, providing broad exposure to the Technology ETFs category of the market.

Investing in dividend-paying stocks within the Technology sector this year could be compelling for several reasons. Firstly, technology companies with a track record of paying dividends are often well-established with stable earnings, suggesting a lower risk profile in a traditionally volatile sector. These companies typically have strong cash flows and robust balance sheets, enabling them to return value to shareholders even during economic downturns.

Additionally, dividends can provide a source of passive income and can help to mitigate potential market losses, which is particularly valuable in an environment of economic uncertainty. With the tech industry continuing to innovate and grow, driven by trends such as digital transformation, cloud computing, and artificial intelligence, there is potential for both capital appreciation and income generation.

Moreover, given the sector’s history of above-average growth, reinvesting dividends from tech stocks can significantly compound returns over time, making them an attractive option for both growth- and income-focused investors in 2024.

Holdings of TDV

TDV consists of 37 stocks, with no position making up more than 3.33% of the portfolio. Positions include plenty of familiar stocks, including

1. International Business Machines (IBM): IBM is a multinational technology company that provides hardware, software, cloud-based services, and cognitive computing. Despite various challenges, IBM has managed to maintain its dividend growth, making it a top holding in the TDV.

2. Apple Inc. (AAPL): Apple is a technology giant known for its range of consumer electronic devices, software, and online services. The company has shown consistent dividend growth over the years, thanks to its strong financial performance and robust product portfolio.

3. Microsoft Corporation (MSFT): Microsoft is a leading global provider of cloud services, software, hardware, and other digital products and services. Like Apple, Microsoft has been a consistent performer in terms of dividend growth, backed by its strong revenue growth.

4. Oracle Corporation (ORCL): Oracle provides a wide array of hardware, software, and services to businesses. Despite facing intense competition in the tech industry, Oracle has maintained a steady increase in its dividends, making it a reliable choice for the TDV.

5. Cass Information Systems (CASS): Cass Information Systems provides payment and information processing services to manufacturing, distribution, and retail enterprises. Although it’s a smaller player compared to the likes of IBM or Apple, CASS has exhibited consistent dividend growth, which has earned it a spot in the TDV.

Sector Composition and Weightings

The TDV primarily targets companies from the information technology sector. However, it also includes companies from Internet and direct marketing retail, interactive home entertainment, and interactive media and services segments of the economy.

20% of the fund is in the semiconductor industry, so keep that in mind as you consider whether you want an allocation here.

Investing in TDV: Pros and Cons

Pros

1. Consistent Dividend Growth: Companies in the TDV must have a track record of at least seven consecutive years of dividend growth, providing a level of income stability for investors.

2. Exposure to Tech Sector: The ETF offers significant exposure to the technology sector, which is known for its high-growth potential.

3. Diversification: Despite its focus on the technology sector, the ETF also includes companies from other sectors, providing a degree of diversification.

Cons

1. Smaller Number of Holdings: With only 37 companies in its portfolio, TDV is more concentrated than many of its peers.

2. Higher Expense Ratio: TDV’s expense ratio (0.45%) is higher than that of many other comparable ETFs, which could eat into returns over the long term.

3. Risk Factors: As with any investment, investing in TDV carries risks, including the risk of capital loss, market price variance, and the possibility of the ETF not achieving its investment objective.

Conclusion: To Invest or Not to Invest?

The ProShares S&P Technology Dividend Aristocrats ETF is a good fund, particularly for those seeking exposure to the technology sector and consistent dividend growth. However, potential investors must also consider the ETF’s higher expense ratio and smaller number of holdings compared to its peers. I still think Technology is way overextended, but the dividend focus can help mitigate momentum loss concerns there.

Markets aren’t as efficient as conventional wisdom would have you believe. Gaps often appear between market signals and investor reactions that help give an indication of whether we are in a “risk-on” or “risk-off” environment.

The Lead-Lag Report can give you an edge in reading the market so you can make asset allocation decisions based on award winning research. I’ll give you the signals–it’s up to you to decide whether to go on offense (i.e., add exposure to risky assets such as stocks when risk is “on”) or play defense (i.e., lean toward more conservative assets such as bonds/cash when risk is “off”).