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A Dividend ETF Looks To Be An Overachiever

ETF Professor

The First Trust Rising Dividend Achievers ETF (NASDAQ: RDVY) is more than five years old and is home to over $776 million in assets under management, yet RDVY retains “hidden gem” status among dividend exchange traded funds.

What Happened

RDVY tracks the NASDAQ US Rising Dividend Achievers Index, which like many other underlying benchmarks for popular dividend ETFs, has a dividend increase streak, but the requirement of five years is less strict than what is found on some competing funds.

RDVY has some other qualifiers, including that member firms “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.

The fund's components also must have posted positive earnings in the most recent fiscal year that topped the prior three years, possess a cash-to-debt ratio of better than 50% and have payout ratios below 65%.

Why It's Important

Due to those requirements for entry, RDVY can offer investors a basket of stocks with strong dividend sustainability and growth potential, but those qualifiers also lead to a small basket as highlighted by the fund's number of holdings of just 50.

“The resulting portfolio tilts toward faster-growing, more-profitable value stocks, falling just outside the blend column of the Morningstar Style Box,” said Morningstar in a recent note. “Its focus on names with strong recent dividend and earnings growth lends itself to pronounced sector concentration.”

Indeed, RDVY does have sector concentration as the financial services and technology sectors combine for nearly 57% of the fund's roster. The dividend ETF is heavily overweight those sectors compared to a slew of the relevant, competing payout funds.

While RDVY is top-heavy at the sector level, it looks to mitigate some of that risk by equally weight its holdings, none of which exceed weights of 2.16%.

What's Next

“I like the concept behind RDVY, but I believe its implementation could be marginally better,” notes Morningstaar. “I think that a methodology that homes in exclusively on emerging dividend payers (leaving the re-emerging ones aside) would stand a better shot of boosting its payout over time.”

While there are some flaws in the fund's methodology, RDVY is up nearly 18% year to date. Morningstar currently does not rate RDVY.

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