Dozens of exchange traded funds offer investors entry to dividend growth strategies. One to remember 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.
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%.
RDVY: A Dividend Grower
Investors should consider quality dividend growth stocks that typically exhibit stable earnings, solid fundamentals, strong histories of profit and growth, commitment to shareholders, and management team convection in their businesses.
Dividends have added significantly to returns over time, contributing approximately 32% of the S&P 500’s total return since 1960. During the return-challenged 1970s, dividends made up nearly three-quarters of S&P 500 returns – while investors earned a cumulative total return of 77% from the S&P 500 in that decade, 60% of that 77% was from dividends.
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.
RDVY's emphasis on dividend growers is particularly relevant in today’s market environment. Dividend-growing companies are also high quality names. Steady dividend payouts have also helped produce improved risked-adjusted returns over time.
Gone are the days when the technology sector was eschewed by income investors. The largest sector weight in the S&P 500 has also been one of the most prolific contributors to the benchmark U.S. index’s dividend growth over the past several years.
The $1.38 billion RDVY holds 50 stocks, 34% of which hail from the technology sector. The ETF yields 1.83%.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.