Almost Your Grandad’s Dividend ETF, but not Quite

It is shaping to be another good year for income investors.

Earlier this year, S&P Dow Jones Indices said “Net dividend increases rose $12.7 billion during the fourth quarter of 2013 for U.S. domestic common stock, compared to an $8.4 billion increase in the fourth quarter of 2012. 885 dividend increases were reported during the quarter, significantly lower than the tax incentivized 1,266 companies which raised dividends in 2012, but up 36.4% from the 649 companies which raised dividends in 2011.” [Divine Dividends Despite Paltry Payout Ratios]

Dividend increases are in style again this year. Just last week, 28 companies boosted payouts, news that should benefit a broad swath of dividend exchange traded funds, including those that focus on length of dividend increase streaks as a selection tool. [New Dividend ETFs Worth Considering]

Most income investors prefer shares of companies that consistently raise their payouts and that methodology has served some dividend ETFs well. For example, the Vanguard Dividend Appreciation ETF (NYSEArca: VIG) and the SPDR S&P Dividend ETF (NYSEArca: SDY) are two of the largest dividend ETFs and require increase streaks of 10 and 25 years, respectively. Those are ETFs your grandfather would love, but there is a new a breed of dividend funds emerging.

That new breed includes the First Trust NASDAQ Rising Dividend Achievers ETF (NasdaqGS: RDVY), which debuted last month.

RDVY follows the NASDAQ Rising Dividend Achievers Index. As is the case with many of indices and dividend ETFs that are linked to those indices, RDVY has a focus on companies that have track records of boosting their payouts. To be included in the NASDAQ Rising Dividend Achievers Index, companies must have “paid a dividend in the trailing twelve-month period greater than the dividend paid in the trailing twelve-month period three and five years prior,” according to First Trust.

However, RDVY’s dividend increase streak requirement is loose compared to rival funds and it is not the only evaluation metric the ETF focuses on. RDVY’s constituents cannot have payout ratios in excess of 65% and must have cash-to-debt ratios above 50%.

That is not to say the equal-weight RDVY does not hold some of the most prodigious U.S. dividend raisers. It does, including Coca-Cola (NYSE: KO) and Exxon Mobil (NYSE: XOM), but the fund is light on usual dividend sectors such as consumer staples. That sector only represents 3.7% of RDVY’s weight while telecom and utilities stocks, two favorites of income investors, are nowhere to be found in the ETF. [Why Dividend ETFs Still Work]