TDIV: Solid Tech ETF But Dividend Growth Isn't Strong (2024)

Overview

One of the biggest gripes I have with most dividend ETFs is that they lack any meaningful exposure to sectors that have more growth oriented holdings. For example, iShares Select Dividend ETF (DVY) is mostly comprised of exposure related to the utilities sector, which is known for its stability and high dividend paying companies, and not for its fast growth. This issue gets addressed by the First Trust NASDAQ Technology Dividend Index Fund ETF (NASDAQ:TDIV), which has a majority focus on technology-based exposure. However, there are some issues that I have with TDIV, which I will also cover here.

When we compare TDIV versus DVY, we can see that TDIV outperforms in total return and price appreciation. This outperformance can be attributed to the unique set of holdings and a predominant tech exposure within the ETF. However, this outperformance comes at a cost as TDIV's dividend yield is on the lower end of the spectrum, sitting at 1.4%. Therefore, TDIV may be a solid ETF choice if you are looking to capture a total return that is mostly comprised of upside price appreciation. However, TDIV may not be the best fit if you are looking to create a large and high-growing stream of dividend income over a short period of time.

Just for some context, TDIV operates as an ETF that aims to provide investment results that align with the Nasdaq Technology Dividend Index. TDIV does this by maintaining a diverse exposure to the technology sector, while filtering holdings to meet specific criteria. The fund is managed by First Trust Advisors and has an expense ratio of 0.50%.TDIV has an inception dating back to 2012 so we have over a decade of price performance to reference. TDIV has about $2.71B in assets under management, and this is spread across many different industries.

Strategy & Holdings

TDIV mains a very diverse set of holdings, with technology holdings making up nearly 87% of the net assets. The remaining sector allocation is mainly comprised of a secondary weighting towards communications at 12.7%. The remaining weight is allocated towards Industrials and Financials, accounting for very immaterial amounts of 0.21% and 0.11%, respectively. Taking a look at TDIV's full list of holdings, we can see that Broadcom (AVGO) makes up the largest percent of net assets. This is closely followed by Apple (AAPL), accounting for 8.3%, as well as Microsoft (MSFT) which makes up 7.55%.

However, if companies like META, GOOG, or NVDA can maintain their dividend streaks as well as get the yields above 0.5%, they can eventually be included into the fund. While I understand the methodology of maintaining exposure to the most reliable dividend payers within the tech sector, I believe this is also a flawed system as it takes away from potential growth opportunities.

We can see that all of the mentioned individual stocks have all outperformed TDIV on a YTD basis. The exclusion of some of these high growth companies means that TDIV shareholders missed out on the massive price movement of NVDA over the last year as well. While I understand that the goal is to maintain a parallel performance to the Nasdaq Technology Dividend Index, I can't help but feel like TDIV is limited its own growth potential by focusing on the dividend aspect of tech companies when companies within the tech sector are rarely recognized for their exceptional dividend performance.

Dividend & Comparison

As of the latest declared quarterly dividend of $0.1907 per share, the current dividend yield is 1.4%. I think that I generally have an expectation that when a fund has the word 'dividend' in its name that there will be a suitable level of dividend growth. However, TDIV doesn't quite provide this in my opinion. For example, the dividend has only increased at a CAGR (compound annual growth rate) of 4.76% over the last three-year period. Even if we zoomed out to a longer time frame of ten years, the dividend only increased at a CAGR of 6.41% which isn't strong enough to make it a good dividend income compounder over time.

To prove this, I will compare the dividend growth of TDIV versus one of the most popular dividend ETFs out there, the Schwab U.S. Dividend Equity ETF (SCHD). SCHD is a dividend ETF that provides a wide range of exposure to all sectors, but the technology sector accounts for less than 10% of the net assets. However, the fund puts a greater emphasis on maintaining exposure to companies that have consistently paid out dividends year after year, while also making sure that its holdings have a consistent history of dividend raises over time. As a result, SCHD gets exposure to some dividend aristocrats and dividend kings, which have consecutive growth streaks of 25 and 50 years respectively.

We can see that SCHD's dividend rate has grown by nearly 127% over the last decade in comparison to TDIV's 26%. In addition to a better growth rate, SCHD's starting dividend is much higher at 3.4%. This means that SCHD offers a better upfront starting income amount, and the higher growth rate means that it requires less capital invested over time to achieve a higher dividend income stream.

To better visualize this, I ran a back test starting from 2015 of an initial investment of $10,000 in both of these holdings using Portfolio Visualizer. This visualize assumes that a fixed monthly contribution of $500 was added to your investment throughout the entire holding period. It also assumes that every dividend received was reinvested back into each respective holding and used to accumulate more shares. From 2015 - present day, your TDIV position would now be worth more through a higher rate of price appreciation. It's also worth noting that your TDIV position would have outperformed the S&P 500 (SPY) during this same time period.

• 2024 SCHD Position Value: $134,060
• 2024 TDIV Position Value: $162,345
• 2024 SPY Position Value: $151,266

The dark blue bar represents TDIV's dividend income and the light green bar represents SCHD's dividend income. In 2015, TDIV would have produced $314 in annual dividend income. Meanwhile, in 2015 SCHD would have produced $388 in annual dividend income, which isn't much of a difference. However, the totals grow wider with every passing year. In 2023, your TDIV dividend income would now equal $2,358 in comparison to SCHD's $4,166. Therefore, if you are looking to build a growing stream of dividend income, SCHD would be the better bet here.

However, if you are looking to capture more upside price appreciation, TDIV would be the better choice for you. Although, if capital appreciation is ultimately what you are after, why consider TDIV at all?

Master Of None

So we've already established that TDIV isn't necessarily the best choice to achieve a growing dividend income over time. Despite its majority tech exposure, I also believe that TDIV isn't really the best place to capture price appreciation as well. If price appreciation is what you're after, then why not just consider Invesco's QQQ Trust ETF (QQQ)? QQQ may only have a dividend yield of 0.5%, but the growth drastically outpaces that of TDIV. While TDIV may be less volatile in nature, QQQ's price growth blows TDIV out of the water because it isn't limited to only holding dividend paying tech companies.

If you are a younger investor and still in the phase of accumulating, you need to consider how much you really value the income aspect of your portfolio. Perhaps you don't necessarily have a need for a stream of income yet, since you are likely still actively working. This unnecessary focus on dividends can stunt your future growth and returns over time. I may have made an exception if the dividend growth of TDIV was strong, but it doesn't justify the total return sacrifice over a long holding period.

Suppose you argue that you still want tech exposure but also a middle ground that can also provide you with a growing stream of dividend income. Well, I would have to refer you to Fidelity's High Dividend ETF (FDVV). FDVV holds a majority focus on the technology sector and also provides a sufficient level of dividend growth. Unlike TDIV, FDVV doesn't have limitations in place that prevent it from obtaining exposure to higher growth tech companies. In fact, FDVV's largest holding by weight is NVDA and the ETF remains more diverse than TDIV, with exposure to a greater amount of sectors.

In addition, FDVV has maintained a higher level of dividend growth. FDVV doesn't have that long of a history being public, but the dividend has increased at a CAGR of 13.83% over the last three-year period. If you are interested in learning more about FDVV, I previously covered the ETF and explained why I like the holdings' breakdown.

Since TDIV is mostly comprised of exposure to technology and communications, this increases the concentration risk associated with holding this ETF. If tech goes into a period of a bear market, TDIV is likely to be more heavily impacted than SCHD or FDVV will be, since these alternatives are more diverse. Therefore, I refer to TDIV has the master of none since there are funds that produce a larger dividend growth as well as funds that can outpace TDIV in price appreciation.

Takeaway

While TDIV certainly does what it aims to do by providing exposure to the tech industry while also providing a higher dividend yield than traditional tech ETFs, I have trouble determining what kind of investor TDIV caters to. TDIV isn't the best dividend growth ETF out there, and it also isn't the best ETF for capital appreciation. The focus on dividends may provide a higher yield than you could typically get from the tech sector, but the filtering system that TDIV uses is a bit flawed in my opinion. The focus on companies with a yield of at least 0.5% and twelve consecutive months of dividend payments eliminates a lot of strong potential holdings such as META, GOOG, or NVDA. Therefore, I am rating TDIV as a Hold.

Financial analyst by day and a seasoned investor by passion, I've been involved in the world of investing for over 10 years and honed my skills in analyzing lucrative opportunities within the market.I specialize in uncovering strategies to utilize various investment vehicles - seeking out high quality dividend stocks, and other assets that offer potential for long term-growth that pack a serious punch for bill-paying potential. I use myself as an example that with a solid base of classic dividend growth stocks, sprinkling in some Business Development Companies, REITs, and Closed End Funds can be a highly efficient way to boost your investment income while still capturing a total return that follows traditional index funds. I create a hybrid system between growth and income and manage to still capture a total return that is on par with the S&P.After humble beginnings sharing my knowledge on Instagram (@thegamingdividend), I have decided to further expand my passion sharing insights here on SA.My money will always be where my mouth is; I am a strong proponent in the FIRE movement and have been perfecting this craft so that I can inspire the average 9-5'er like myself, that early retirement is within reach without compromising the safety of your portfolio.