Are Investors Too Obsessed With Dividends?


For years, investors have looked to dividend-paying stocks as an answer to a host of concerns. By providing much-needed income that other types of assets have largely lacked recently as well as partially protecting against share-price drops, dividend stocks have become the go-to investment for a wide range of investors.

But lately, the demand for dividend-paying investments has turned into almost an obsession. And as with other fads in the past, the dividend craze has triggered a typical response from the financial industry: the creation of new investment vehicles to give people exposure to the securities they want so badly.

Tech, dividends, and ETFs
Technology stocks have traditionally stood clear of the trend toward dividends. Tech companies have been reluctant to pay dividends for many reasons. In some cases, companies have expressed a desire to have plenty of cash on hand to acquire companies or make other strategic moves to bolster their business prospects. Another more selfish reason may have to do with tech company compensation, which has historically revolved around stock options. Because dividend payments typically reduce the value of a company's shares, options become less valuable. Therefore, many tech companies have used stock buybacks instead, which focus more on capital appreciation that can bolster stock-option values.

More recently, though, tech stocks have finally started to join the dividend rush. With Apple (NAS: AAPL) and Cisco Systems (NAS: CSCO) , massive amounts of cash on their balance sheets makes it easy for the companies to part with a portion of their war chests and reward investors with dividends. Yet a wide range of other companies, ranging from computer giantDell (NAS: DELL) to the much smaller mobile-chip maker Marvell Technology (NAS: MRVL) , have found it expedient to start returning capital to shareholders through dividends.

To cash in on that trend, the First Trust Nasdaq Technology Dividend Index Fund started trading earlier this week. The ETF intends to own as many as 100 tech and telecom companies that pay dividends that yield at least 0.5% and have not been reduced within the past year.

A weak connection
As valuable as dividends can be, though, I have trouble with the extent to which new ETFs are stretching to latch on to the dividend-chasing trend. Well-established dividend ETFs have tended to look for above-average market yields or solid dividend growth as factors for selecting stocks, leading to a healthy selection of companies that clearly see dividends as an important part of their relationship with shareholders.

The First Trust ETF, on the other hand, sets an almost ridiculously low threshold for tech companies to qualify. Given the long dividend histories that stalwart chip makerIntel (NAS: INTC) and many other tech stocks have, there's really no need to arbitrarily set the 0.5% yield requirement so low. Although there may be some value in a company's having committed to the concept of a dividend at all, there's a big qualitative difference between a stock with a token dividend of 1% or less and a stock that manages to surpass the overall market's average of around 2%.

Go your own way
When ETFs fail to deliver the goods that investors want, you always have the option to go out on your own. One easy way to proceed is to use the list of holdings from the First Trust ETF as a starting point for further research, then choose a subset of those stocks as candidates for greater consideration. Whether you choose to look for the highest-yielding stocks in the sector or instead seek out companies with consistent histories of raising dividends regularly, weeding out some of the chaff among dividend-paying tech stocks could serve you well.

ETFs are a great way to invest quickly and simply. But when an ETF comes out in order to meet demand for an investing fad, choosing an alternative often brings you closer to your intended goals. In this case, I think you should be more discriminating than the First Trust ETF in picking dividend stocks from the tech industry.

For more ideas on individual dividend stocks worth considering, take a look at The Motley Fool's free report "Secure Your Future With 9 Rock-Solid Dividend Stocks."

Also, between Apple and Intel, you can get a lot more than just a nice dividend. Get the whole story from our top tech analysts with their views on both Apple and Intel.

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Fool contributor Dan Caplinger is obsessed with keeping an even keel. He doesn't own shares of the companies mentioned in this article. You can follow him on Twitter @DanCaplinger. The Motley Fool owns shares of Intel, Cisco Systems, and Apple. Motley Fool newsletter services have recommended buying shares of Intel and Apple, as well as creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy feeds your obsessions.

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Originally published