PDF The Nasdaq Technology Dividend Index

Tech / Trade / Intel / List

DECEMBER 2016

THE NASDAQ TECHNOLOGY DIVIDEND INDEX

A Great Complement to Broad Dividend Portfolios

Just a few years ago technology stocks and dividends were a misnomer in the investment world. However, increases in earnings, cash holdings, and stable levels of debt point to the maturation of the technology sector, thus providing increased returns to shareholders with dividend payments.

Launched on June 20, 2012, the Nasdaq Technology Dividend Index offers exposure to this subset of the investment universe with over four years of live history and back-test data to 2007. It serves as the underlying index for the First Trust Nasdaq Technology Dividend Index ETF (Nasdaq: TDIV).

BUILDING THE CASE FOR THE TECHNOLOGY SECTOR AS A DIVIDEND PLAY /

The tech dividend story is not limited to a handful of big companies; the entire sector has seen significant growth in dividend payments and was the fastest growing sector of dividends paid in the past ten years. Between 2006 and 2015, the technology sector within the Nasdaq US Benchmark Index has increased its dividend value paid out by 315.85%, with Health Care following next in line at 72.69%.

The technology sector is the clear growth leader for dividends, having had the highest dividend growth rate of all industries going back to 2006. Technology companies weathered the storm of the financial crisis and have come away with strong balance sheets including better cash flows and lower levels of debt.

When compared to other sectors, the gains in technology dividend payments have been much more consistent. As an example, the financial sector experienced rapid increases with a 29% increase from 2004 to 2008, but overall experienced near-zero cumulative dividend growth from 2006 to 2015.

INDUSTRY

Technology Health Care

Oil & Gas Consumer Goods

Utilities Industrials Financials Basic Materials Telecommunications Consumer Services

CUMULATIVE DIVIDEND GROWTH (2006-2015)

315.85% 72.69% 65.59% 48.69% 36.03% 5.16% 0.03% -11.54% -26.80% -47.62%

In 2015, Technology was the second highest dividend payer of the ten Industry Classification Benchmark (ICB) industries at $53B, trailing Financials ($92B). To put that into perspective, in2006, Technology was the lowest dividend payer ($13B).

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Technology companies have been better able to maintain and increase dividends, partially due to the consistent cash flows generated from their businesses. Looking at cash and marketable investments on hand, technology is the second largest sector behind financials with $699 billion. Technology companies have significant cash holdings and minimal creditors, therefore, when compared to other sectors, are in a better position to continue to pay dividends moving forward. This is evidenced by their significantly higher cash-to-debt ratio of 1.41; all other industries have a cash-to-debt figure of 0.59 or below.

ICB INDUSTRY NAME

Technology Financials Health Care Consumer Goods Industrials Consumer Services Oil & Gas Basic Materials Telecommunications

Utilities TOTAL

NO. COMPANIES

295 693 376 236 462 355 132 99 31 72 2,751

CASH ($B)

699 2,561 282

207 250 206 99 28 32 25 4,390

DEBT ($B)

494 4,353 604

665 864 868 512 178 348 503 9,388

CASH-TO-DEBT

1.41 0.59 0.47 0.31 0.29 0.24 0.19 0.16 0.09 0.05 0.47

NASDAQ TECHNOLOGY DIVIDEND INDEX: FUNDAMENTALS /

The Nasdaq Technology Dividend Index (NQ96DIVUS) was created to capitalize on the growing trend of dividend paying technology stocks. The index is comprised of companies classified as either technology or telecommunications as determined by the ICB. The index caps each sector exposure at 80% for technology and 20% for telecommunications and is weighted by dividend value paid out. As of September 2016, the Nasdaq Technology Dividend Index compares much more favorably than other dividend indexes based on index fundamentals. When comparing the Dow Jones US Select Dividend Index (DJDVY) against the Nasdaq Technology Dividend Index, the Nasdaq components have increased paid dividends, earnings, and cash at a far greater pace than the Dow Jones' components.

2007

2008

2009

700 600 500 400 300 200 100

0 NQ96DIVUS: Dividends

DJDVY: Dividends

2010

2011

NQ96DIVUS: Earnings

2012

2013

2014

2015

Sep-16

DJDVY: Earnings

NQ96DIVUS: Cash &

DjDVY: Cash &

Marketable Securities Marketable Securities

An interesting ratio to examine with a focus on dividends is the cash-to-debt ratio. Strong dividend paying companies will have a higher cash-to-debt ratio and thus are financing more activities with cash versus debt. The components in NQ96DIVUS demonstrate a much more impressive ratio than the DJDVY components. The technology components have been increasing cash reserves at a far greater rate than their debt increases.

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Cash/Debt Ratio

1.20 1.00 0.80 0.60 0.40 0.20 0.00

2007

2008

2009

NQ96DIVUS

DJDVY

2010

2011

2012

2013

2014

2015

2016*

The valuation of NQ96DIVUS, as measured by the P/E ratio, has recently eclipsed DJDVY due in large part to the Nasdaq Technology Dividend Index's massive earnings growth of 175% versus only 21% for the Dow Jones US Select Dividend Index since 2007.

NQ96DIVUS has managed to maintain a fairly flat P/E ratio, suggesting that its constituents have shown robust earnings while maintaining reasonable technology and telecommunications stock prices. It is a different story for the utilities and industrialsheavy DJDVY: its underlying companies have not succeeded at exceling in earnings without inflating stock prices, suggesting that DJDVY might be overvalued. At the same time NQ96DIVUS has outperformed DJDVY by delivering a resilient dividend streamline and increasing in true value.

NQ96DIVUSX

DJDVY

NQ96DIVUSX: PE

DJDVY: PE

250

35

30 200

25

150 20

100

15

10

50 5

0

0

INDEX PERFORMANCE 3/30/07 12/31/07 12/31/08 12/31/09 12/31/10 12/31/11 12/31/12 12/31/13 12/31/14 12/31/15 9/30/16

P/E

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CURRENT INDEX FUNDAMENTAL TRENDS /

Average 1-year Dividend Growth

Average Market Cap (Billions)

Average 3-year EPS Growth

Average Payout Ratio

NQ96DIVUS 27.8%

37.18 67.8% 81.0%

DJDVY 1.1%

32.57 11.1% 88.6%

MDYFT 13.2%

53.52 54.7% 76.0%

SPHYDATR 9.2%

38.08 24.1% 58.5%

As of the end of October 2016, looking at the current index fundamental trends one can see the perpetuating claim throughout this piece come to fruition ? the Technology Dividend Index has higher dividend growth, higher earnings, similar company size and payout ratio figures as the other dividend indexes.

INDEX PERFORMANCE /

NASDAQ U.S. BENCHMARK TR INDEX (NQUSBT) DOW JONES SELECT DIVIDEND TR INDEX (DJDVY) MORNINGSTAR DIVIDEND YIELD FOCUS TR INDEX (MDYFT) 250

200

150

100

50

0

NASDAQ TECHNOLOGY TR DIVIDEND INDEX(NQ96DIVUSX) S&P HIGH YIELD DIVIDEND ARISTOCRATS TR INDEX (SPHYDATR)

3/30/07 3/30/08 3/30/09 3/30/10 3/30/11 3/30/12 3/30/13 3/30/14 3/30/15 3/30/16

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RETURN

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016*

NQUSBT

5.03% -36.32% 29.26% 17.55%

0.31% 16.43% 33.48% 12.46% 0.48% 6.11%

NQ96DIVUSX

12.96% -37.81% 50.31% 13.55% -2.84%

7.10% 31.24% 16.34% -5.43% 16.13%

DJDVY

-7.29% -30.97% 11.13% 18.32% 12.42% 10.84% 29.06% 15.36% -1.64% 14.92%

SPHYDATR

-7.54% -23.01% 18.94% 16.80%

7.63% 11.88% 30.59% 14.27% -0.38% 13.05%

MDYFT

-2.46% -21.94% 11.86% 11.48% 13.42%

5.65% 19.53% 8.75% -4.02% 7.69%

VOLATILITY

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016*

NQUSBT

16.77% 40.53% 27.87% 18.61% 24.24% 13.03% 11.36% 11.68% 15.36% 14.19%

NQ96DIVUSX

18.15% 38.73% 29.02% 18.60% 24.17% 14.92% 11.92% 12.17% 17.12% 16.46%

DJDVY

19.11% 47.34% 29.44% 16.36% 19.86% 10.07% 10.92% 10.20% 13.79% 12.37%

SPHYDATR

17.61% 44.00% 33.87% 15.89% 21.02% 11.18% 11.12% 10.02% 13.95% 12.60%

MDYFT

16.45% 35.04% 21.88% 13.57% 15.85% 9.01% 10.05% 9.40% 14.20% 11.39%

CORRELATION TO NQUSBT Full Period (2007-2016)

NQ96DIVUSX 0.932

DJDVY 0.928

SPHYDATR 0.898

MDYFT 0.933

The Nasdaq Technology Dividend Index demonstrates a higher cumulative total return over the historical period beginning March 30, 2007, through October 31, 2016, when compared to other dividend indexes and the broad market as a whole. Interestingly, the correlation of NQ96DIVUS and other dividend indexes to the Nasdaq US Benchmark is quite close, ranging from 0.898 of the SPHYDATR Index to 0.933 of the MDYFT Index with NQ96DIVUS falling at 0.932.

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