Khaosai Wongnatthakan
The 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 picking technology stocks based on dividend growth history is that the fund gives investors exposure to those technology companies that have a great business model and a proven track record of consistently generating high levels of revenues and profits, which then get channeled towards shareholders as dividends. These companies are some of the biggest players in their respective industries and are in a better position to handle the tough economic environment than others. Most of the ProShares S&P Technology Dividend Aristocrats ETF’s underlying holdings now sport a decent dividend yield and look attractively valued. I think this might be a great ETF for investors to consider.
About ProShares S&P Technology Dividend Aristocrats ETF
The ProShares S&P Technology Dividend Aristocrats ETF, or TDV, gives investors exposure to those technology companies that have grown dividends for at least seven consecutive years. In terms of size, TDV is a relatively small fund, with $100.5 million of assets under management, as opposed to some of the biggest and most well-known technology ETFs like the Invesco QQQ Trust (QQQ) and the Vanguard Information Technology ETF (VGT) which hold $147 billion and $42.5 billion of funds, respectively. However, what sets TDV apart is that, unlike all other technology ETFs, TDV is the only ETF that concentrates on investing in the Dividend Aristocrats from the technology sector.
TDV tracks the performance of the S&P Technology Dividend Aristocrats Index, which includes the IT sector companies from the S&P Total Market Index that have grown dividends for at least seven straight years.
Dividend Aristocrats
Usually, those companies are called ‘Dividend Aristocrats’ who have been growing dividend payments for at least 25 years, such as the Coca-Cola Co. (KO), or Colgate-Palmolive Co. (CL), or Walmart Inc. (WMT). But this list includes just two technology stocks- International Business Machines (IBM) and Automatic Data Processing (ADP). A vast majority of dividend-paying technology companies do not have that kind of history.
In fact, some of the leading technology companies of today – such as Apple (AAPL) – didn’t even pay a regular dividend 25 years ago.
Understandably, TDV adjusted the definition of the dividend aristocrat by bringing the dividend growth term down to seven years. This allowed the ETF to hold dozens of technology stocks, instead of focusing on just IBM and ADP.
TDV gives investors exposure to around 40 technology stocks, including well-established companies such as Apple, Microsoft (MSFT), Qualcomm (QCOM), and HP (HPQ). As evident from these names as well as the fact that the small-cap tech companies typically don’t pay regular dividends, the ETF is tilted heavily towards large-cap stocks. Its average market cap of a holding is $161.7 billion.
All of the stocks in TDV are equally weighted. The index gets rebalanced every quarter and reconstituted at the start of each year. Due to its equal weight methodology, the fund doesn’t have a bias for an individual stock, or even for a single industry. TDV gives the greatest weight to the data processing and outsourced services industry, followed by the semiconductors industry, which accounts 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-flying tech companies, which typically trade at a premium over other sectors, have come under a lot of pressure. The S&P 500 information technology sector has tumbled by 27% this year, as opposed to other sectors such as consumer staples and healthcare, which have also been under pressure but have fared far better than IT.
Although TDV has dropped sharply, with a decline of 18% on a year-to-date basis, it has still outperformed the broader technology sector, which I believe is a testament to the strength of its underlying holdings. Some of the large, well-established, dividend-paying technology stocks like Apple have held up better than many mid and small-cap companies, and this had a positive impact on TDV’s performance.
Looking ahead, however, the investors remain jittery about the future, amid concerns about inflation and the economy. The US has already seen two consecutive quarters of drop in GDP which, technically, pushed the country into recession in H1-2022. Although the GDP expanded by 2.6% (annualized) in the third quarter, it remains to be seen whether this can turn into a trend. I think if exports come under pressure which increases the trade deficit and the high interest rates negatively affect consumption, then that might push the company back into recession.
The well-established technology companies held by TDV are in a better position to handle this uncertain macro-environment than their smaller rivals. They have a robust business model, underpinned by a great product and a large customer base. They have been generating reliable levels of revenues, earnings, and cash flows, which enabled them to reward shareholders by persistently growing dividends for years.
One of TDV’s holdings Qualcomm, for instance, could continue to benefit from the rise in processor content per device, internet of things (IoT) revenues, and automotive business. The company has been growing rapidly this year, as evident from the more than 37% increase in adjusted revenues and 54% increase in adjusted EPS growth reported in the third quarter, with an across-the-board surge in revenues in all segments.
Granted Qualcomm might not report similar numbers next year, but I believe it could still outperform the broader industry which might struggle to grow revenues. The company should benefit from growth in some businesses (the auto revenues, for example, are forecasted to grow at a CAGR of around 24% through FY-2031 to $9 billion), which might make up for weakness in others.
The top and bottom-line growth should allow Qualcomm to continue returning cash to shareholders as dividends. Qualcomm has an impressive history of growing dividends for 19 straight years, and I don’t see any significant threats to dividends in the future.
Although investors typically don’t associate dividend growth with technology stocks, TDV is a rare ETF whose tech holdings have a rich history of returning cash to shareholders by increasing dividends, year in and year out. The dividend growth streak of a little more than half of the ETF’s holdings (52.5%) has clocked in at 10 years or more. This includes some high-quality names, including Qualcomm, which generate tons of profits and cash flows every year and I think they are well positioned to grow in the future as well.
Moreover, TDV also comes with a decent dividend yield. Technology companies aren’t usually considered attractive stocks from a dividend yield perspective. But due to the recent decline, the shareholder payouts of many companies can now compete with the S&P 500’s dividend yield of 1.6%.
At the time of this writing, 22 out of TDV’s 40 holdings (or 55% of the holdings) were offering a dividend yield that was equal to or greater than the S&P 500’s. The ETF’s 30-day SEC yield is a decent 1.86%.
Final Thoughts
TDV gives investors exposure to dozens of mostly large-cap, well-established technology companies, most of which generate earnings and have been growing dividends for 10 years or more. These large-cap companies can ride out the current storm and will likely deliver a better performance than their rivals. In my opinion, TDV is a great ETF that investors might want to consider buying.
TDV is also looking good from a valuation standpoint. A number of its holdings, such as Qualcomm, HP, Broadcom (AVGO), and Cisco (CSCO), are trading well below the industry’s median P/E (Fwd) multiple of 17x, as per data from Seeking Alpha. Overall, TDV’s 22 holdings (or 55% of the holdings) are trading below the industry’s median. Besides a couple of stocks that have a sector-relative grade of D+ and are trading at a lofty premium, a vast majority of the stocks are either priced below or slightly higher than the sector median P/E (Fwd) ratio.
Moreover, there are some risk factors that investors should also consider before buying TDV. It is worth repeating here that TDV is still a fairly small-sized fund with around $100 million of assets under management. With a median daily trading volume of fewer than 10,000 shares (last 45 days), it is certainly not as liquid as other technology ETFs, and it might not be suitable for those traders who want to quickly move in and out of positions.
Furthermore, although the large-cap technology companies that TDV holds, like Qualcomm, can survive the downturn, they are not completely immune to the global economic slowdown. In a tough global macroeconomic backdrop marked by high inflation in many countries and a strong greenback, the demand for PCs, smartphones, other devices, and components like processors and memory chips might witness a greater-than-expected decline. This could hurt numerous TDV holdings.
Qualcomm, for instance, may witness substantial weakness in the smartphone market. Since more than 60% of the company’s QCT revenues (its largest segment) come from handsets, this might drag the company’s earnings lower in the future. Similarly, other TDV holdings might also report a drop in sales and profits if the economic climate keeps getting worse.
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