And that makes sense: The number of dividend-paying technology firms in the S&P 500 has shot up by one-third since 2010, according to S&P Capital IQ’s Scott Kessler, who runs that firm’s technology research department. “You need to think about the tech sector as being uniquely positioned for robust dividend growth in the years ahead,” he adds. (Here’s a hint: Amy Calistri’s newsletter readers are well aware of that looming trend.) Along with tech, industrials, consumer discretionary stocks and consumer cyclical stocks are the primary focus.
My primary complaint with this fund is that it is focused only on large firms (each component has a market value of at least $2 billion). Smaller companies are often capable of even more robust dividend growth as they can tend to be earlier in their life cycle.
There is the WisdomTree SmallCap Dividend Fund (ETF) (NYSEARCA:DES), but this doesn’t really have the dividend growth orientation that we’re talking about. The fund’s 0.28% expense ratio is respectable, but cheaper options are available. (Note that according to recent filings, Wisdom Tree indeed appears to be poised to launch a small-cap version of the dividend growth ETF.)
The Vanguard Option
For the ultra-low-cost approach, check out the Vanguard Dividend Appreciation ETF (NYSEARCA:VIG), which owns companies with a history of 10 straight years of dividend growth. This approach brings two small drawbacks.
First, any companies that were forced to reduce or eliminate their dividend during the financial crisis of 2008 won’t be here, even though a number of these companies are now back on track with solid divided boosts.
Second, it ignores the wide variety of tech stocks that only began paying dividends in recent years. For example, Apple Inc. (NASDAQ:AAPL) won’t be in this fund for another decade.
Still, the Vanguard fund has real strengths. In giving the fund a five-star rating, Morningstar analystsnoted: “Whereas many dividend-focused funds concentrate in smaller value companies, this fund shades slightly toward growth. VIG is a great choice for a core allocation.”
Moreover, like many Vanguard funds, the 0.13% expense ratio is quite pleasing, so your long-term gainswon’t be diverted away to the fund company’s coffers.
The PowerShares Dividend Achievers (ETF) (NYSEARCA:PFM) and the First Trust Morningstar Divid Ledr (ETF) (NYSEARCA:FDL) have a similar focus to the Vanguard fund, though they carry higher expense ratios of 0.60%, and 0.45%, respectively.
Risks to Consider: Dividend growers should relatively greater appeal than companies and funds that have limited growth prospects, but all equity-based income producers may sell off if fixed-income rates move sharply higher.
Action to Take –> Though rates are coming up off of generational lows, they are unlikely to rise much higher, killing the dividend party. Instead, assume a moderate move up in rates over time that still leaves plenty of room for robust dividend growers in your portfolio as well.
This article was originally written by David Sterman and posted on StreetAuthority.
