Dividend exchange traded fund investors should look at their exposure to rate-sensitive sectors and consider switching over to dividend growth leaders.
In a rising rate environment, ETFs with high exposure to utilities, telecom services and real estate investment trusts could run into trouble, writes Neena Misha for Zacks. On the other hand, technology and finance sectors perform during cyclical expansions and have been increasing their dividends.
S&P research revealed that dividend net increases was up $17.6 billion in the second quarter, with 591 reported dividend increases, up 17% year-over-year.
Markit projects that S&P 500 dividends in the second half of 2013 will rise 13% year-over-year, with tech stocks leading the dividend payouts, followed by oil & gas and banks.
According to WisdomTree, tech stocks have made up over 54% of dividend increases in the past five years while financials accounted for the biggest dividend growth in the last three years.
Given the current growth environment, many companies are opting to return excess cash to shareholders, instead of putting the money into large scale projects or M&A activities.
The First Trust NASDAQ Technology Dividend Index Fund (TDIV) provides exposure to a number of tech stocks with dividend yields higher than the S&P 500. Top holdings include Cisco Systems (CSCO) 8.6%, Apple (AAPL) 8.1%, Microsoft (MSFT) 7.4%, Intel (INTC) 7.3% and International Business Machines (IBM) 7.1%. TDIV has a 2.86% 30-day SEC yield and a 0.50% expense ratio.
The WisdomTree U.S. Dividend Growth Fund (DGRW) selects stocks based on long-term earnings growth expectations and weights components by aggregate cash dividends paid. Top holdings include Apple 4.9%, Microsoft 4.0%, Procter & Gamble (PGM) 3.6%, Wal-Mart (WMT) 3.5% and Coca-Cola (KO) 2.8%. Top sectors include industrials 20.1%, information technology 20.1% and consumer discretionary 19.9%. DGRW has a 2.0% 30-day SEC yield and a 0.28% expense ratio.
The Vanguard Dividend Appreciation ETF (VIG) tracks high quality companies with a record of increasing dividends for at least 10 years. Top holdings include Pepsico (PEP) 4.2%, Procter & Gamble 4.2%, Coca-Cola 4.2%, Abbot Laboratories (ABT) 4.1% and Wal-Mart 4.1%. Top sectors include consumer staples 21.9%, industrials 19.1% and consumer cyclical 15.4%. VIG has a 0.10% expense ratio and a 2.09% 12-month yield.
Max Chen contributed to this article.