TDV: A Rare Dividend Aristocrat Technology ETF (BATS:TDV)

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Khaosai Wongnatthakan

That ProShares S&P Technology Dividend Aristocrats ETF (Bats: TDV) is a unique fund that holds 40 technology companies that have been growing dividends for at least seven years. A clear benefit of stock-based picking technology As part of its dividend growth history, the fund gives investors exposure to technology companies that have great business models and a proven track record of consistently delivering high revenues and profits, which are then passed to shareholders as dividends. These companies are among the biggest players in their respective industries and are in a better position to weather the difficult economic environment than others. Most of the stocks underlying the ProShares S&P Technology Dividend Aristocrats ETF now have decent dividend yields and appear attractively valued. I think this could be a great ETF for investors.

About the ProShares S&P Technology Dividend Aristocrats ETF

The ProShares S&P Technology Dividend Aristocrats ETF, or TDV, provides investors with exposure to the technology companies that have increased dividends for at least seven consecutive years. In terms of size, TDV is a relatively small fund with $100.5 million under management, in contrast to some of the largest and most well-known technology ETFs such as the Invesco QQQ Trust (QQQ) and the Vanguard Information Technology ETF ( VGT). ), which have funds of $147 billion and $42.5 billion, respectively. What sets TDV apart, however, is that unlike all other tech ETFs, TDV is the only ETF that focuses on investing in the Dividend Aristocrats from the tech sector.

TDV tracks the performance of the S&P Technology Dividend Aristocrats Index, which includes companies in the IT industry from the S&P Total Market Index that have increased dividends for at least seven consecutive years.

Dividend Aristocrats

Usually, such companies are referred to as “dividend aristocrats” that have been increasing dividend payments for at least 25 years, such as Coca-Cola Co. (KO) or Colgate-Palmolive Co. (CL) or Walmart Inc. (WMT). But this list includes only two tech stocks — International Business Machines (IBM) and Automatic Data Processing (ADP). The vast majority of dividend-paying tech companies don’t have that kind of history.

In fact, some of today’s leading tech companies — like Apple (AAPL) — didn’t even pay a regular dividend 25 years ago.

Understandably, TDV adjusted the definition of the Dividend Aristocrat by shortening the dividend growth period to seven years. This allowed the ETF to hold dozens of technology stocks instead of just focusing on IBM and ADP.

TDV gives investors access to around 40 technology stocks, including established companies such as Apple, Microsoft (MSFT), Qualcomm (QCOM) and HP (HPQ). As indicated by these names and the fact that small-cap tech companies don’t typically pay regular dividends, the ETF is heavily biased towards large-cap stocks. The average market capitalization of a holding is $161.7 billion.

All TDV shares are equally weighted. The Index is rebalanced quarterly and recomposed at the beginning of each year. Due to its equal-weights methodology, the fund has no single stock or even single industry bias. TDV gives the highest weight to the data processing and outsourcing services industry, followed by the semiconductor industry, which account for 23% and 18.5% of the ETF’s assets, respectively.

Why TDV?

This has been a tough year for technology stocks. Shares of many high-quality technology companies, which typically trade at a premium to other sectors, have come under severe pressure. The information technology sector of the S&P 500 is down 27% this year, in contrast to other sectors like consumer staples and health care, which have also suffered but have fared far better than IT.

Although TDV has fallen sharply, down 18% year-to-date, it has still outperformed the broader technology sector, which I think is a testament to the strength of its underlying holdings. Some of the large, well-established, dividend-paying tech stocks like Apple have held up better than many mid- and small-cap companies, which helped TDV’s performance.

Looking ahead, however, investors remain nervous about the future amid inflation and economic concerns. The US has already experienced two consecutive quarters of contraction in GDP, which has technically pushed the country into recession in the first half of 2022. Although GDP grew by 2.6% (annualised) in the third quarter, it remains to be seen whether a trend can develop from this. I think if exports come under pressure, increasing the trade deficit and high interest rates hurt consumption, then that could push the company back into recession.

TDV’s incumbent technology companies are better positioned to navigate this uncertain macro environment than their smaller peers. They have a robust business model backed by a great product and customer base. They generate reliable levels of sales, earnings, and cash flow that have enabled them to reward shareholders with steadily growing dividends for years.

One of TDV’s holdings, Qualcomm, for example, could continue to benefit from increases in processor content per device, Internet of Things (IoT) revenues, and auto businesses. The company has grown rapidly this year, as evidenced by a more than 37% increase in adjusted revenue and a 54% increase in adjusted EPS growth reported in the third quarter, with an overall increase in revenue across all segments .

Granted, Qualcomm might not report similar numbers next year, but I believe it could still outperform the broader industry, which may struggle to grow revenue. The company should benefit from growth in some of its businesses (for example, auto revenue is expected to grow 24% to $9 billion through fiscal 2031), which could offset weakness in others.

The revenue and earnings growth should allow Qualcomm to continue returning cash to shareholders in the form of dividends. Qualcomm has an impressive history of growing dividends for 19 straight years, and I don’t see any significant threats to dividends going forward.

Though investors don’t typically associate dividend growth with tech stocks, TDV is a rare ETF whose tech holdings have a long history of returning cash to shareholders by increasing dividends year after year. The dividend growth streak of just over half of the ETF’s holdings (52.5%) is 10 years or more. That includes some quality names, including Qualcomm, that generate tons of earnings and cash flow every year, and I think they’re well-positioned to continue to grow going forward.

In addition, TDV also comes with a decent dividend yield. Technology companies aren’t typically considered attractive stocks in terms of dividend yield. But due to the recent drop, many companies’ shareholder payouts can now rival the S&P 500’s 1.6% dividend yield.

As of this writing, 22 of TDV’s 40 holdings (or 55% of holdings) offered a dividend yield that was equal to or higher than the S&P 500. The ETF’s 30-day SEC yield is a decent 1.86%.

Final Thoughts

TDV offers investors access to dozens of mostly large-cap, established technology companies, most of which are income-generating and dividend-growing for at least 10 years. These large-cap companies can weather the current storm and are likely to outperform their peers. In my opinion, TDV is a great ETF that investors might want to consider.

TDV also looks good a valuation Position. A number of its holdings, such as Qualcomm, HP, Broadcom (AVGO) and Cisco (CSCO), are trading well below the industry median P/E (Fwd) of 17, according to data from Seeking Alpha. Overall, TDV’s 22 holdings (or 55% of holdings) trade below the industry median. Aside from a few stocks, which have an industry-specific rating of D+ and are trading at a substantial premium, the vast majority of stocks are listed either below or slightly above the median price-to-earnings (Fwd) ratio of the sector.

Also, there are some risk factors investors should also consider before buying TDV. It’s worth reiterating that TDV is still a fairly small fund, with around $100 million under management. With an average daily trading volume of less than 10,000 shares (last 45 days), it’s certainly not as liquid as other technology ETFs and may not be suitable for traders looking to get in and out of positions quickly.

Additionally, while TDV holds large-cap tech companies like Qualcomm, while they may survive the downturn, they are not completely immune from the global economic slowdown. In a difficult global macroeconomic environment, characterized by high inflation in many countries and a strong greenback, demand for personal computers, smartphones, other devices and components such as processors and memory chips could experience a stronger than expected decline. This could harm numerous TDV holdings.

Qualcomm, for example, could see significant weakness in the smartphone market. With more than 60% of the company’s QCT revenue (its largest segment) coming from mobile phones, it could drag down the company’s earnings going forward. Similarly, other TDV holdings could also report a decline in sales and profits if the economic climate continues to deteriorate.

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