Payout Growth, Market Volatility Has Dividend ETFs Back in Style

This year is proving to be an ideal time for investors to revisit dividend exchange traded funds, including the First Trust Rising Dividend Achievers ETF (NasdaqGS: RDVY).

Dividend ETFs’ back-in-style status is supported on multiple fronts. First, domestic payouts ascended to another record in the first quarter. Second, broader market volatility enhances the allure of dividend strategies. For its part, RDVY is beating the S&P 500 by nearly 400 basis points on a year-to-date basis, and investors are taking note.

“Dividend ETFs seem to have grown in popularity, with net inflows totaling $17.0 billion over the past 3 months and $44.5 billion over the past 12 months, as of 4/29/22. In April, while equity ETFs overall endured $5.9 billion of net outflows, dividend ETFs reported net inflows totaling $7.8 billion,” according to First Trust research.

RDVY, which tracks the Nasdaq US Rising Dividend Achievers Index, is highly relevant in the current environment. The Nasdaq US Rising Dividend Achievers Index requires member firms to be paying a dividend today that’s in excess of what was paid “in the trailing twelve-month period three and five years prior.”

RDVY’s underlying index employs other quality metrics, which are also highly relevant today. Those include a mandate that holdings have positive earnings per share over the trailing three fiscal years and cash-to-debt ratios exceeding 50%. Companies in the index also cannot have payout ratios in excess of 65%.

“Cash to debt ratios must be above 50%, providing a margin of safety for dividend policies. Finally, 50 stocks with the most attractive combination of dividend growth, dividend yield, and payout ratio are selected, subject to a maximum of 30% from any one sector. The stocks are equally weighted initially and on each rebalancing effective date. The portfolio is reconstituted annually and rebalanced quarterly,” added First Trust.

Due to the stringent requirements of the Nasdaq US Rising Dividend Achievers Index, it’s not surprising that some sectors aren’t represented in the fund. Those are real estate and utilities, both of which are often homes to high payout ratios. Financial services and technology — higher-quality destinations — combine for 40.53% of the fund’s weight.

Beyond compelling sector exposures, RDVY is an interesting idea today for equity income investors because inflation highlights the allure of dividend growth strategies.

“Dividend growth strategies are often appealing to investors concerned about high inflation eroding the buying power of their investment income. Thus, the focus for such strategies is not necessarily on the highest dividend-yielding stocks today, but rather on total return and dividend-payers that may be well-positioned to raise dividends in the future,” concluded First Trust.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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