Among the many exchange traded funds emphasizing dividend growth, there is the First Trust NASDAQ Rising Dividend Achievers ETF (NasdaqGS: RDVY).
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%.
“At 3½ years old, the fund has roughly $250 million in assets. While that’s a solid asset base, it doesn’t put it anywhere in the neighborhood of the biggest dividend ETF offerings from the likes of Vanguard or BlackRock. It’s not for a lack of performance though. Over the past three years, the fund has returned 12.1% per year compared to a 10.7% average annual return for the S&P 500, a track record that’s earned the fund a 5-star rating in Morningstar’s large cap value category,” according to ETF Daily News.
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RDVY holds 51 stocks and about 51% of the ETF’s combined sector exposures are financial services or technology stocks. Industrial and consumer discretionary names combine for a third of the ETF’s weight, giving RDVY a highly cyclical feel.
“While long-term dividend payers would certainly qualify, it opens the doors for many companies who have only recently started consistently growing their dividends. RDVY also layers on screens for earnings growth, cash-to-debt and payout ratios, so it tries to include only companies that can be reasonably expected to continue growing their dividend, but the history for many companies is limited at best,” reports ETF Daily News.
Companies that have consistently increased dividends tend to be high in quality and show a strong potential for growth. These dividend growers have been able to withstand periods of market duress, exhibiting smaller drawdowns as investors sold off riskier assets, while still delivering strong returns on the upside, to generate improved risk-adjusted returns over the long haul.
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