Tech Dividends Impact on ETFs Could Take a While

One of the biggest stories of 2012 for income investors has been the ascent of the technology sector to dividend royalty. Long known as bastion of growth, not robust payouts or yields, the technology sector is the largest dividend-paying group within the S&P 500.

Buoyed by Apple's (NASDAQ:AAPL) first dividend and a recent 75 percent payout increase courtesy of Cisco Systems (NASDAQ:CSCO), among others, tech now accounts for 14.22 percent of S&P 500 dividends, just ahead of the 14.21 percent the consumer staples group represents, Barron's reported last month.

Today, the tech sector accounts for 13.2 percent of all U.S. dividends paid compared to just 5.6 percent in 2007, writes WisdomTree Research Director Jeremy Schwartz.

Despite the sector's rise to dividend prominence, it could be a while before tech has a substantial impact on dividend ETFs. Try a decade, maybe two, according to Schwartz. The reason is that many dividend ETFs screen for those stocks that have established track records of dividend increases. Hence, names such as AT&T (NYSE:T), Coca-Cola (NYSE:KO) and Procter & Gamble (NYSE:PG) are standard fare in many of the largest dividend funds.

That is not a bad thing, but for now at least, the focus by dividend ETFs on those companies with lengthy histories of increased payouts mutes the potentially positive impact the technology sector's new found dividend affinity can have on these funds.

For example, the Vanguard Dividend Appreciation ETF (NYSE:VIG), the largest dividend ETF, only allocates 6.4 percent of its weight to tech names and the bulk of that concentration goes to Dow component International Business Machines (NYSE:IBM). IBM accounts for 4.1 of VIG's weight. VIG "povides a convenient way to track the performance of stocks of companies with a record of growing their dividends year over year," according to Vanguard's web site.

Similarly, the SPDR S&P Dividend ETF (NYSE:SDY) is focused on regular dividend raisers. SDY tracks the S&P High Yield Dividend Aristocrats Index, which is "designed to measure the performance of companies within the S&P Composite 1500 that have followed a managed-dividends policy of consistently increasing dividends every year for at least 20 years," according to Standard & Poor's.

SDY, which has $9.4 billion in assets under management, allocates less than 2.6 percent of its weight to tech stocks. SDY and VIG are just two examples of ETFs where it could take a while for rising tech dividends to have an impact. Regarding Apple, it could be 2023, or 2033 in some cases, before the stock is added to indexes tracked by ETFs using a dividend track record screen, Schwartz notes.

"While I understand that a proven history of growth theoretically provides some semblance of assurance that a company can continue to pay dividends, I believe these ETFs may be missing the forest for the trees (not to mention taking an undue stock selection risk by concentrating their exposure on a smaller number of firms that meet these explicit criteria)," Schwartz said in the note.

Schwartz noted that Cisco is a member of the the WisdomTree Domestic Dividend Indexes and Apple and Dell (NASDAQ:DELL), now a dividend payer, will be eligible for inclusion when the indexes rebalance on November 30.

Compared to VIG and SDY, a couple of WisdomTree ETFs have high tech sector exposure. The WisdomTree Total Dividend Fund (NYSE:DTD) allocates 9.2 percent of its weight to tech stocks while the WisdomTree LargeCap Dividend Fund (NYSE:DLN) devotes 10 percent of its weight to tech.

For more on tech dividends and ETFs, click here.