With Treasury rates maintaining their level below 2% for 10 Year debt, many investors have been forced to focus in on stocks for current income needs. Fortunately, there is no shortage of options in this market, as there are several stocks and funds that offer exposure to high dividend payers both across the board and in more specialized segments such as BDCs or MLPs.
Yet despite growing interest and competition in the segment, ETF providers are by no means slowing down their expansion in the space, launching new products all time that target high dividend payers. In continuing with this trend, First Trust has announced the debut of two more high dividend ETFs, potentially giving investors a few more diversified ways to play the space (see Three Excellent Dividend ETFs for Safety and Income).
While these new funds will face some extremely intense competition in the dividend ETF market, their interesting methodologies and focuses could make them solid picks for those who are still hoping to get on the dividend ETF bandwagon. For these investors, we have taken a closer look at the two new products in greater detail below:
NASDAQ Technology Dividend Index Fund (TDIV - ETF report)
When investors think of tech stocks, the last thing that comes to mind is probably dividends or high payout rates. After all, Apple is only now beginning to pay out a dividend to investors, while several other tech behemoths, such as Google, EMC, and Adobe, offer nothing to investors in terms of yield either.
However, this perception could begin to change with First Trust’s ETF that focus in on technology companies that pay out dividends. This is done by tracking the NASDAQ Technology Dividend Index which is a broad benchmark of tech and telecom firms (weighted 80/20 in favor of tech) that have a yield of at least 0.5% and have not decreased dividends in the past year.
In total, the fund holds about 60 securities in its basket, with +7% weightings going towards Qualcomm, Microsoft, IBM, and Intel. The rest of the top seven is rounded out by Cisco, Oracle, and Texas Instruments, suggesting that the fund could be relatively top heavy and focused in on big and giant cap names (also read Can You Beat These High Dividend ETFs?).
Still, this approach could help give investors access to a segment of the economy that isn’t known for its high yields but is still an important segment to the overall economic outlook. Furthermore, according to First Trust research, technology firms have seen the most growth in annualized dividends paid over the past seven years, increasing at a rate of nearly 16.5% per year.
While there is no way of knowing if this trend will continue into the future, the fact remains that most dividend-heavy portfolios are extremely light on technology firms, suggesting that this could be an interesting compliment to many portfolios.
Moreover, the reasonable expense ratio of 50 basis points a year isn’t too bad for the targeted exposure, although it does look to be a bit higher than some of the other, broader dividend ETFs out on the market today.
Multi-Asset Diversified Income Fund (MDIV - ETF report)
This product tracks the NASDAQ Multi-Asset Diversified Income index, which seeks to provide investors with solid dividend yields from a variety of sources. By using a multi-sector/asset class approach, the fund looks to have lower overall volatility levels and potentially more diversification that similar dividend-focused ETFs which just focus on a single segment or asset class (also see the Complete Guide to Preferred Stock ETF Investing).
With this focus, the fund invests in a basket of securities including dividend paying stocks, REITs, MLPs, preferred stocks, and high yield corporate bonds. The fund looks to allocate roughly 20% each to MLPs, REITs, and Preferred Securities, and then 25% to dividend paying stocks and 15% to a high yield corporate bond ETF.
Each of these particular segments have their own stipulations, further drilling down into only the safest, most liquid, or most popular choices in each space. For example, the dividend paying equities are weighted by yield and must have realized volatility less than the NASDAQ US Benchmark index’s measure (See 11 Great Dividend ETFs).
Meanwhile, MLPs must have volatility less than a comparable MLP Index while REITs need to have a dividend payout ratio of less than 150%. There are many more rules for the fund (you can see them here) but the process looks to be quite detailed and an overall robust one for picking securities.
This results in a portfolio of about 125 securities in total with the highest weight going to the iShares iBoxx $ High Yield Corporate Bond Fund (HYG - ETF report), accounting for all of the high yield corporate bond exposure in the portfolio. Beyond that fund, top holdings go to individual securities like American Capital Agency Corp, Invesco Mortgage Capital, and Two Harbors Investment Corp.
However, investors should note that the fund will charge a somewhat steep 68 basis points in fees while it will rebalance on a quarterly basis. This could leave it as a more expensive choice than many other pure-equity dividend ETFs, but likely a competitor on price with some of the more diversified funds in the space as well.
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