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
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
Apple's got a lot more going for it than just a nice spankin' new dividend. Find out the whole scoop on the tech giant in the Fool's premium report on Apple, where our tech analysts put together their best thoughts on where the company is headed. Try it out today.
Fool contributor Dan Caplinger doesn't like to miss out on anything. You can follow him on Twitter @DanCaplinger. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of ExxonMobil, Apple, and Cisco Systems. Motley Fool newsletter services have recommended buying shares of and creating a bull call spread position on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy pays dividends.