Dividend growth is a compelling indicator of a company’s financial strength. Investors can target this disciplined business model through exchange traded fund strategies. In the recent webcast, ETF Strategies for Rising Dividends from High Quality Companies , Dan Waldron, Senior Vice President, ETF Strategist, First Trust, warned that traditional bond assets generate low yields, are exposed to greater rate risk, and have lower returns relative to equities.
For example, the U.S. Aggregate Bond Index shows a 1.39% yield, as compared to the S&P 500’s 1.32% yield. Additionally, looking at the the past 35-year-average annual returns, the Agg generated a 6.16% return, compared to the S&P 500’s 10.86% return.
Alternatively, income-minded investors can consider dividend growing companies that offer attractive capital appreciation and dividend yields. Waldron pointed out that dividend-growing companies generate strong free cash flows, have a management focused on creating shareholder value, show a disciplined use of cash, come with high performance expectations, and possess built-in value with historically low volatility.
Waldron pointed out that dividend growers have historically exhibited the lowest risk by standard deviation of returns, compared to dividend payers, highest yield dividend payers, and non-dividend payers. Meanwhile, dividend growers have shown relatively similar returns to non-dividend payers.
As a way to gain exposure to quality dividend growers, Waldron highlighted the First Trust Rising Dividend Achievers ETF (NasdaqGS: RDVY).
The First Trust Rising Dividend Achievers ETF tracks 50 companies with a history of raising their dividends and the capacity to continue to increase their dividends over time. The ETF uses historical and forward-looking screens to identify companies with the ability to grow dividends and share price. Additionally, the strategy’s sector weights are tilted toward sectors that have shown above average dividend growth rates over the last five years.
Waldron also noted that RDVY heavily tilts toward financials and information technology sectors, which are best-positioned for above-average growth ahead.
The First Trust Rising Dividend Achievers ETF tracks the NASDAQ US Rising Dividend Achievers Index, which holds 50 U.S. large caps that have been screened for their quality and dividend growth, while eliminating REITs from consideration.
Rather than emphasizing pure yield or a company’s history of raising payouts, the ETF focuses on metrics like earnings, debt-to-equity, and payout ratios to assess not only a company’s ability to sustain its current dividend, but grow it over time. That positions the First Trust fund to capitalize on what is an increasingly positive payout environment.
To be eligible for inclusion in the 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, show a positive earnings per share in the most recent fiscal year greater than the earnings per share three fiscal years prior, have a cash-to-debt ratio greater than 50%, and come with a trailing twelve-month period payout ratio no greater than 65%.
Financial advisors who are interested in learning more about dividend investments can watch the webcast here on demand.