Payout growth and market volatility have made dividend ETFs all the rage

JThis year is proving to be the perfect time for investors to review dividend exchange-traded funds, including First Trust Rising Dividend Achievers ETF (NasdaqGS:RDVY).

The back-in-style status of dividend ETFs is supported on several fronts. First, domestic payments hit another record high in the first quarter. Second, increased market volatility is increasing the appeal of dividend strategies. For its part, RDVY has beaten the S&P 500 by nearly 400 basis points year-to-date, and investors are taking notice.

“Dividend ETFs appear to have grown in popularity, with net inflows totaling $17.0 billion in the past 3 months and $44.5 billion in the past 12 months, as of 4/29/22. April, while equity ETFs overall experienced net outflows of $5.9 billion, dividend ETFs saw 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 companies to pay a greater dividend today than was paid “in the last twelve months three and five years ago”.

RDVY’s underlying index uses other measures of quality, which are also very relevant today. These include a mandate that holdings have positive earnings per share over the past three years and cash-to-debt ratios above 50%. Nor can index companies have payout ratios higher than 65%.

“Cash-to-debt ratios should be above 50%, providing a safety margin 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 sector. Shares are equally weighted initially and on each effective rebalancing date. The portfolio is replenished annually and rebalanced quarterly,” First Trust added.

Due to the strict requirements of the Nasdaq US Rising Dividend Achievers Index, it is not surprising that certain sectors are not represented in the fund. These are real estate and utilities, which are often homes with high payout ratios. Financial services and technology – higher quality destinations – combine for 40.53% of the fund’s weighting.

Beyond attractive sector exposures, RDVY is an attractive idea for equity investors today, as inflation highlights the appeal of dividend growth strategies.

“Dividend growth strategies are often attractive to investors who fear that high inflation will erode the purchasing power of their investment income. Thus, such strategies do not necessarily focus on the highest dividend yielding stocks today, but rather on total return and dividend payers who may be well positioned to increase dividends in the future,” concluded First Trust.

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