AVGO - TDIV: Attractive Valuation Average Quality

2023-11-06 16:13:07 ET

Summary

• First Trust NASDAQ Technology Dividend Index Fund ETF holds 83 dividend stocks in information technology and communication services.
• The TDIV ETF is overweight in semiconductors and in the top 5 holdings as well.
• TDIV has attractive valuation ratios compared to sector benchmarks but has lower growth, quality and performance metrics.

This article series aims at evaluating ETFs (exchange-traded funds) regarding the relative past performance of their strategies and metrics of their current portfolios. Reviews with updated data are posted from time to time.

TDIV strategy and portfolio

First Trust NASDAQ Technology Dividend Index Fund ETF ( TDIV ) started investing operations on 8/13/2012 and tracks the NASDAQ Technology Dividend Index. As of writing, it has a portfolio of 83 stocks, a 12-month distribution yield of 1.93% and a total expense ratio of 0.50%. Distributions are paid quarterly.

As described by NASDAQ , the index "includes up to 100 Technology and Telecommunications companies that pay a regular or common dividend."

To be eligible, stocks must be listed on a U.S. stock exchange, be classified in Technology or Telecommunications by the Industry Classification Benchmark, and have at least:

• $500 million in market capitalization.
• $1 million in 3-month average daily traded value.
• 0.5% in dividend yield.

Companies are excluded if they have decreased the dividend per share in the past 12 months, entered into a definitive M/A agreement or filed for bankruptcy or similar protection. A maximum of 100 companies passing these rules are included in the index among those with the highest dividend per share over the last 12 months. The index is reconstituted twice a year and rebalanced quarterly based on a modified dividend value-weighted methodology with weight limits (80% in technology, 20% in telecommunications). Securities may be removed at any time if they don't meet eligibility criteria. In this case, they are not replaced until the next reconstitution.

The fund is mostly invested in U.S. companies (about 85% of asset value) and in large caps (80%). It is overweight in semiconductors and semiconductor equipment (35%). Software weighs 20% and other industries represent between 1% and 10% of assets. Compared to the sector benchmark Technology Select Sector SPDR Fund ETF ( XLK ), TDIV overweights mostly semiconductors and IT services. It massively underweights software and hardware. Moreover, 14% of assets are in the communication services sector.

The fund is very concentrated: the top 10 holdings, listed below, weigh 53.6% of asset value. Exposure to each of the top 5 names is between 7% and 9%. Risks related to other constituents are moderate.

Regarding valuation ratios reported in the next table, TDIV is significantly cheaper than the sector benchmark XLK. I have added in the comparison ProShares S&P Technology Dividend Aristocrats ETF ( TDV ), another dividend-focused technology ETF reviewed here , and the large cap benchmark S&P 500 (SP500). TDIV is also cheaper than them. However, it has the lowest growth metrics in this group.

Data: Fidelity.

TDIV past performance

TDIV is almost on par with the S&P 500 in 10-year total return, and far behind the sector benchmark XLK.

In the last 3 years, is behind XLK and TDV, and shortly ahead of SPY.

In 2023 to date, it beats the broad index and TDV, but still lags XLK.

Comparing TDIV to a dividend quality benchmark

In previous articles, I have shown how three factors may help cut the risk in a dividend portfolio: Return on Assets , Piotroski F-score , and Altman Z-score .

The next table compares TDIV since 9/1/2012 with a subset of the S&P 500: stocks with a dividend yield above the average of their respective indexes, an above-average ROA, a good Altman Z-score, a good Piotroski F-score and a sustainable payout ratio. It is rebalanced annually to make it comparable with a passive index.

Past performance is not a guarantee of future returns. Data Source: Portfolio123.

TDIV underperforms the dividend quality subset by 26% in total return. However, TDIV performance is real, whereas the subset is a simulation. My core portfolio holds 14 stocks selected in this subset (more info at the end of this post).

The annual sum of distributions went up from $0.57 per share in 2013 to $1.20 in 2022. This 110% growth beats SPY distributions (+88% in the same time) and the cumulative inflation (27% based on CPI). Except a pullback in 2015, distributions have increased quite steadily. Although TDIV is not a dividend growth fund, it looks quite attractive in this regard.

Scanning TDIV with quality metrics

Among the 83 stock holdings, 18 are risky regarding my metrics. In my ETF reviews, risky stocks are companies with at least 2 red flags: bad Piotroski score, negative ROA, unsustainable payout ratio, and bad or dubious Altman Z-score, excluding financials and real estate where these metrics are less relevant. Here, risky stocks weigh 10% of asset value, which is an improvement since my previous review in June.

According to my calculations reported below, the portfolio quality is inferior to the sector benchmark. It is close to TDV regarding the return on assets.

Takeaway

First Trust NASDAQ Technology Dividend Index Fund is invested in 83 dividend-paying companies from the technology and communication sectors. The portfolio is concentrated: more than one-third of asset value is in one industry (semiconductors) and in the top 5 holdings. TDIV looks attractive regarding valuation and dividend growth, but quality and performance are underwhelming.

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