Dividend stocks and ETFs had seen a lot of interest in the past 2-3 years as investors searched for yield in the ultra-low interest environment. However they have been out of favor of late, since the taper talk has resulted in interest rates inching higher. Further, many sectors that are high dividend payers—like utilities, telecom, and staples—had become rather expensive and were punished by investors worried about the rate increase.
Is Dividend Investing Dead?
Even though dividend stocks and ETFs have been experiencing some headwinds in the face of taper talk, they should remain a part of any investment portfolio focused on the long term. Dividends have accounted for more than 40% of total returns from the market over a long time horizon (over the past 80 years). (Read: 3 ETFs for Rising Interest Rates)
Per S&P, dividend net increases (increases less decreases) rose $17.6 billion during Q2 2013, as 591 dividend increases were reported during the quarter, up 17% from 505 dividend increases reported during Q2 2012.
The trend is expected to continue in the coming months as most large companies have huge cash piles on their balance sheet and are in a position to increase payouts to shareholders.
Further due to the muddle-through growth environment, many companies continue to avoid large scale capital expenditure and M&A activities and rather prefer to return excess cash to shareholder by way of dividends and buy backs.
In my view, ETFs that hold stocks with a high dividend growth potential are much better for long-term investing than ETFs that focus on high dividend yielding stocks.
How do Investors Reposition their Dividend Portfolios?
ETFs that have high exposure to utilities, telecom and REITs, will likely remain out of favor with investors, amid rising interest rates and worries about the Fed’s plans for scaling down its bond-buying program. It is time investors should focus on the new dividend growth leaders-mainly technology and finance.
According to Markit, S&P 500 dividends in 2H13 will be up 13% from last year, with Technology sector leading in terms of change from last year, followed by Oil & Gas and Banks. Markit dividend model currently ranks Insurance, Banks and Technology sectors as most favorable.
During the last five years, technology sector has accounted for more than 54% of the increase in dividends and financials have accounted for the largest increase in last three years, per WisdomTree. (Read: 3 ETFs for Manufacturing Renaissance)
Below we have analyzed three ETFs that have excellent dividend growth potential.
WisdomTree U.S. Dividend Growth ETF (NASDAQ:DGRW)
Investors looking for dividend growth opportunities while staying diversified across sectors could consider the new product from WisdomTree that has a has forward-looking dividend growth focus.
The index uses both growth and quality factors with the growth factor ranking based on long-term earnings growth expectations and the quality factor ranking based on three year historical averages for return on equity and return on assets.
Further, the Index is dividend weighted to reflect the proportionate share of the cash dividends each component company is expected to pay in the coming year. The fund has a 30 day yield of 2.01% as of now.
Apple, Microsoft, P&G, Wal-Mart and Coca-Cola are the top five holdings as of now. Among the sectors—the fund has highest allocation to Technology, Industrials and Consumer Discretionary sectors. It has an expense ratio of 28 basis points.
First Trust NASDAQ Technology Dividend Index (NASDAQ:TDIV)
Many companies in this sector already pay out very attractive dividends; tech giants like Intel, Cisco, Microsoft and Apple,