The tech sector has been THE sector to own over the past 13 months. Since the Christmas Eve low on December 24th, tech has easily outpaced the S&P 500 and every other major market sector.

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For dividend seekers, it's been a different story. With unemployment still near record lows, GDP growth still at reasonable levels and the Fed throwing hundreds of billions of dollars at the economy, this has been a growth-driven market. Conservative and defensive plays, such as dividend payers, have been relatively out of favor.

They haven't necessarily been poor performers, but they've lagged the broader market.

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The three pillars of dividend investing that I often like to talk about - dividend growth, dividend quality and high yield - all trailed by some degree with the high yielders performing worst of the bunch.

The First Trust NASDAQ Technology Dividend ETF (TDIV) is a great option because it offers that bridge between growth and income. Investors who want to capture the momentum and upside of tech but want an above average dividend yield from the sector's most stable and cash rich names will find TDIV very appealing.

While TDIV hasn't performed quite as well as the broader tech sector, it's managed to beat not just every other major dividend strategy but the S&P 500 itself!

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There's no real magic formula for building the portfolio. TDIV simply looks for companies that:

  • have paid a regular or common dividend within the past 12 months
  • have a yield of at least 0.5%
  • have not had a decrease in common dividends per share paid within past 12 months
  • are not currently in bankruptcy proceedings

The fund uses a "modified dividend value weighting" methodology. The dividend value is calculated by multiplying dividends paid per share within the past 12 months by the current shares outstanding. Stocks with greater total dividend payouts get larger weightings in the fund's index.

It's not a terribly high bar to clear in order to qualify for inclusion, but the targeted exposure to the tech sector combined with the focus on dividend income is the key.

A big reason for TDIV's recent success is its sector allocation.

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It has nearly 50% of the portfolio dedicated to the semiconductor and software industries - perhaps the two areas of the tech sector that performed best in 2019. The technology hardware, storage and peripherals subindex was up a whopping 99%, so TDIV was invested in all the right areas.

You might notice the 20% allocation to telecom services. That's an official part of the fund's objective and results in modest allocations to stocks, such as China Mobile, AT&T, Telefonica Brasil and Telus.

TDIV's top 10 holdings are essentially a who's who of the tech sector.

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All of the big tech giants are represented. Apple and Microsoft, the fund's top two holdings, also happen to be the only companies within the top 10 that have dividend yields less than the S&P 500. Seven have yields over 2%, while Broadcom, IBM and China Mobile are above 3%.

Overall, that puts TDIV's trailing 12-month dividend yield at about 2.2%, roughly 0.5% above that of the S&P 500.

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Again, not a huge yield premium but if you can get a forward yield of 2.3% with all of the potential upside of the tech sector, it's a narrative that plays quite well in the current environment.

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