If you're looking for income in today's market, you don't have many good options. With many high-quality bonds paying rock-bottom rates and insured bank CDs offering only a little bit more, traditional fixed-income securities don't get the job done for many income-hungry investors. As a result, dividend stocks have become the go-to investment for income over the past several years.
In light of that demand, a number of exchange-traded funds targeting dividend stocks have gained dramatically in popularity, attracting capital from those investors wanting a simple one-stop solution to own a rich array of dividend payers. But as a recent research report details, whenever you choose an ETF to do your shopping for you, you have to make sure you know what you're getting. Otherwise, you may get a nasty surprise.
The newest dividend winners
WisdomTree Research came out with an interesting report that discussed the changing trends in the dividend world. For a long time, you could divide the universe of stocks roughly into two categories. For the most part, high-growth stocks didn't pay substantial dividends, as they sought to reinvest as much of their spare capital as possible back into their business to maximize total growth. On the other hand, once an industry became mature, it no longer needed all that capital to grow, and so it could afford to pay some of it out to shareholders as dividends.
Recently, though, there's been a changing of the guard in terms of high-growth industries and mature industries. Most notably, the biggest technology companies have gone from being lightning-fast-growth leaders to becoming cash cows with huge reserves on their balance sheets -- and they're starting to pay dividends.
The report points out two companies as top examples of this trend. As it is in so many things, Apple (Nasdaq: AAPL ) is arguably the most extreme case, having gone from paying no dividend at all to making dividend payments at roughly a $10 billion annual clip. By doing so, the iDevice giant vaulted itself to the No. 3 spot in terms of total dividends paid, lagging only behind ExxonMobil (NYSE: XOM ) and AT&T (NYSE: T ) .
Cisco (Nasdaq: CSCO ) is the other company the report focuses on. The networking leader already paid a dividend, but it recently boosted its payout by a whopping 75%, just over a year after initiating its payout. The rapidity of Cisco's dividend growth shows how competitive dividend payout policies have become among Big Tech.
Why ETFs don't own them
The problem, though, is that many indexes of dividend stocks, as well as the ETFs that track those indexes, don't own tech stocks like Apple and Cisco. In particular, many of the more popular dividend-stock indexes screen out companies that don't have a minimum number of years of stable or growing dividends.
Because of that, the dividend ETFs that track those indexes will have a long wait ahead of them before they can buy Apple or Cisco. Some may pick up the tech giants in five years' time -- assuming all goes well with the payouts. But others, such as those tracking the prestigious Dividend Aristocrats, won't touch the companies until 2031 or 2032 at the earliest.
The last thing that most dividend investors want is to be behind the times. If tech stocks are where the greatest dividend growth is likely to come from, then having at least some exposure to the sector will be critical to get the best returns. Unfortunately, until ETFs become more flexible and are willing to admit new entrants with promising dividend prospects sooner -- like, perhaps, WisdomTree's own Total Dividend ETF (NYSE: DTD ) happens to -- then they'll miss out on those new stocks.
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