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Technology, Growth, and Dividends… in One Bundle

By Selena Maranjian - Apr 22, 2013 at 7:32PM

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There are some double-digit dividends in here.

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some technology-heavy and dividend-paying stocks to your portfolio, the First Trust NASDAQ Technology Dividend Index ETF (NYSEMKT: TDIV) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The First Trust ETF's expense ratio -- its annual fee -- is a relatively low 0.50%. The fund is fairly small, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

This ETF is too young to have a meaningful track record to assess. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

Why technology and dividends?
Our growing world population will demand more and better high-tech products and services over time, boosting the business of successful technology-oriented companies. Meanwhile, the power of dividend investing is often underappreciated. They can be powerful portfolio supporters, providing income even during market downturns. Consider parking them in an IRA, too, to postpone or avoid taxes on dividends.

More than a handful of technology-heavy, dividend-paying companies had strong performances over the past year. (It's also worth noting that those that fell actually now sport higher dividend yields, so they may be of extra interest if you still believe in their prospects.) Applied Materials (AMAT -1.04%), for example, rose 12%, and yields 3.1%, which includes a recent 10% dividend hike. Bulls expect it to benefit from a hoped-for increase in semiconductor demand globally, as there have already been some promising signs for the semiconductor industry. With a forward P/E of 14, the stock appears appealing. In February, management noted an 80% uptick in semiconductor orders, among other things.

Other companies didn't do as well last year, but could see their fortunes change in the coming years. Corning (GLW -2.69%) was flat, and yields 2.7%. Demand for its Gorilla Glass is strong, generating more than $1 billion in 2012 revenue, and its flexible new Willow Glass is promising -- and might end up in Apple's new iWatch (though Apple is reportedly interested in sapphire now, which might spell trouble). Despite some issues such as falling profit margins, there's a solid case to be made that the stock is attractively priced at recent levels and a good long-term investment.

Pitney-Bowes (PBI -1.09%) shed 7%, and yields a whopping 10.4%. Some may be surprised that the company still exists, thinking of it merely as a postage-meter business in an era of growing digital communications. But Pitney-Bowes has other less-threatened (and higher-margin) businesses, such as providing geocoding software to companies such as Facebook. Its profit margins have risen in recent years, and its single-digit P/E ratio is enticing, but it does carry some risks and considerable debt. The stock is heavily shorted as well.

Rural telecom specialist Windstream (WINMQ) sank 15%, and sports a massive dividend yield of 11.3%. Windstream's revenue has been growing while net income has been shrinking. It carries a lot of debt, and its profit margins have been falling over several years. Still, the company is diversifying away from rural operations a bit via acquisitions, investing in faster-growing businesses, and insiders have been buying. It may be worth watching, at least.

The big picture
Demand for technology isn't going away anytime soon. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

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Stocks Mentioned

Corning Incorporated Stock Quote
Corning Incorporated
$31.51 (-2.69%) $0.87
Pitney Bowes Inc. Stock Quote
Pitney Bowes Inc.
$3.62 (-1.09%) $0.04
Windstream Holdings, Inc. Stock Quote
Windstream Holdings, Inc.
Applied Materials, Inc. Stock Quote
Applied Materials, Inc.
$90.98 (-1.04%) $0.96

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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