This Dividend ETF Was Ready for Nvidia's Payout Increase

When it released quarterly results, Nvidia (NASDAQ: NVDA) surprised investors by announcing a 2,400% increase to its dividend, ratcheting up the payout to $0.25 per share per quarter from a measly $0.01 per share.

That takes the semiconductor stock's dividend yield to 0.4%. While that's less than half the yield on the S&P 500, it is more in line with yields on other mega-cap stocks and the Nasdaq-100. That index, one in which Nvidia is the largest component, yields 0.4%.

This ETF was ready for Nvidia's surprise dividend increase. Image source: Getty Images.

An interesting footnote about Nvidia's enhanced dividend status is that many dividend exchange-traded funds (ETFs) weren't prepared for the increase. Still, the WisdomTree U.S. Quality Dividend Growth Fund (NASDAQ: DGRW) was. It's interesting why that's the case.

DGRW does things differently

Explaining why the 13-year-old, $16.7 billion WisdomTree ETF has, as of May 20, an 8.8% weight (higher than the S&P 500's exposure to the stock, by the way) to Nvidia isn't difficult. Many legacy dividend ETFs focus on yield or the length of payout-increase streaks. This ETF does neither, meaning it can include low-yielding stocks.

That explains why the ETF has a 32.1% weight to tech stocks, which is high among dividend ETFs. The WisdomTree fund tracks the WisdomTree U.S. Quality Dividend Growth Index, which focuses on growth and quality factors rather than past dividend growth or yield. Said differently, the index attempts to get a handle on what future dividends from holdings will look like, not what's in the past.

So because Nvidia met the index's five-year earnings and sales growth parameters as well as its three-year return on equity (ROE) and return on assets (ROA) mandates, the stock commanded podium positioning in the fund despite little attention paid to the dividend.

Beyond Nvidia, this ETF's methodology is also interesting historically. It underscores why the fund was among the first dividend ETFs to include Apple when the iPhone maker boosted its dividend for the first time in 2013 and why it was one of the first to include Alphabet and Meta Platforms when those companies unveiled their initial dividends. All three of those stocks are top-10 holdings in the WisdomTree ETF, while those competing funds have lower or no exposure to these names.

Does DGRW's recipe work?

For generations, equity income investors largely glossed over tech, but the sector's dividend profile has materially improved in recent years. In dollar terms, it's one of the largest dividend-paying sectors in the S&P 500, potentially signaling an opportunity with the WisdomTree ETF given its significant tech exposure.

Of course, investors are right to ponder the effects of the fund's tech ties. Past performance isn't a promise of future returns, but over the decade ending May 1, just one dividend ETF outperformed the WisdomTree fund, and it, too, is tech-heavy.

This ETF's performance advantage stems from outpacing rivals on ROA and ROE. Those factors imply durability and dividend reliability. The WisdomTree U.S. Quality Dividend Growth Fund charges 0.28% per year, or $28 on a $10,000 stake. That's high among passive dividend ETFs, but below the typical expense ratio on competing actively managed funds.

Todd Shriber has positions in WisdomTree U.S. Quality Dividend Growth Fund. The Motley Fool has positions in and recommends Alphabet, Apple, Meta Platforms, and Nvidia. The Motley Fool has a disclosure policy.