RDVY is a simple dividend growth index ETF. Dividends have grown over 20% per year since inception, vastly outpacing its peers. Although the fund is a solid dividend growth fund, it currently only yields 2.3%
RDVY ETF: Double-Digit Dividend Growth, Cheap Valuation, Good Track Record
The First Trust Rising Dividend Achievers ETF (NASDAQ:RDVY) is a simple U.S. dividend growth index ETF. RDVY's strong dividend growth track-record, cheap valuation, and good performance track-record make the fund a buy. RDVY only yields 2.3%, so the fund might be more appropriate for long-term dividend growth investors, less so for those desiring strong income right now.
RDVY – Overview
RDVY is a dividend growth index ETF, tracking the Nasdaq US Rising Dividend Achievers. It is a relatively simple index, investing in the 50 U.S. stocks with the strongest combination of dividend growth, yield, and payout ratio. In practice, dividend growth matters the most. As with most indexes, there are industry caps meant to ensure a modicum of diversification. It is an equal-weighted index.
RDVY is a reasonably well-diversified fund, with investments in 50 securities, and with exposure to most relevant industry segments. RDVY's holdings are a somewhat eclectic mix, with investments in well-known dividend equities like Exxon (XOM), Visa (V), and Pfizer (PFE), as well as investments in less well-known names like Synchrony Financial (SYF) and Equitable Holdings (EQH). Still, these are all stocks with above-average yields and dividend growth track-records, consistent with the fund's index.
RDVY's industry exposures are as follows.
As is the case for most value and dividend ETFs, RDVY is overweight old-economy industries like financials, industrials, and energy, as these tend to sport above-average yields, with strong dividend growth track-records. On the other hand, the fund is underweight tech and telecommunications, as these industries tend to pay very low dividends, if any, and most lack lengthy dividend growth track-records. RDVY is quite a bit more underweight telecommunications than its peers.
Due to the above, RDVY's relative performance is strongly dependent on the relative performance of the aforementioned industries. The fund tends to outperform when financials, industrials, and energy outperform, and when telecommunications and tech underperform. This was last the case in 2022.
On the flipside, the fund tends to underperform when financials, and the rest, underperform, and when telecommunications and tech outperform. This was last the case in 2020.
In my opinion, RDVY's industry exposures are neither a negative nor a positive, but they are an important fact that investors should consider. As an example, RDVY might not make sense for bearish investors concerned about the impact rising interest rates have had on bank balance sheets, as the fund is overweight financials.
Besides, the above, nothing much else stands out about RDVY's strategy, index, or holdings. Let's now have a look at the fund's benefits.
RDVY – Benefits
Strong Dividend Growth Track-Record
RDVY focuses on the 50 U.S. equities with the strongest combination of dividend growth, yield, and payout ratio. In practice, dividend growth is key, which results in a fund with an incredibly strong dividend growth track-record.
Double-digit dividend growth is the norm, with the fund's dividends growing at a +20% CAGR since inception, and for most relevant time periods. Growth averaged 78% last year, an incredibly strong figure. ETF dividends are somewhat volatile, so growth could be (partly) explained by volatility. Still, from what I've seen, growth was real, and backed by underlying dividend / income growth.
RDVY's dividend growth track-record compares favorably to that of the S&P 500, and to its larger peers.
RDVY's yield on cost figures look fine, perhaps even above-average, although definitely not outstanding. As the fund's starting yield is quite low, currently at 2.3%, even long-term investors see only moderate income / receive only moderate dividends.
On a slightly more positive note, recent stock market weakness means the fund currently trades with a reasonable compelling price and yield. As such, long-term investors should see stronger yield on costs than implied above, at least assuming dividend growth remains strong.
RDVY's strong dividend growth track-record is a benefit for the fund and its shareholders. As the fund's starting yield is quite low, the fund is more appropriate for long-term dividend growth investors, less so for those seeking current income, in my opinion at least.
Cheap Valuation
RDVY's valuation is surprisingly cheap, with a PE ratio of 8.0x, and a PB ratio of 1.9x. Both are very low figures on an absolute basis, and much lower than those of the S&P 500, and those of the fund's larger peers.
RDVY's cheap valuation is due to the fund focusing on stocks with (slightly) above average yields, and due to overweighting cheaply valued industries. The latter is almost certainly caused by the fund's dividend growth filters: expensive growth stocks rarely have long, strong dividend growth track-records.
RDVY's cheap valuation could lead to significant capital gains and outperformance, contingent on valuations normalizing. Valuations have tended to normalize since around 2021, with most value funds outperforming since. RDVY has technically outperformed too, but by very little.
Most large dividend and value ETFs have performed somewhat better than RDVY.
From the above, it seems that the fund's cheap valuation has mostly not led to significant gains or outperformance in the recent past. I'm not actually sure why this was the case, as most cheaply valued funds, investments, and asset classes have performed quite well recently. There have been a few exceptions, including emerging market equities, but none that apply to RDVY. Still, the fund's performance remains reasonably good, and its cheap valuation has not detracted from performance in the past.
RDVY's cheap valuation remains a benefit for the fund and its shareholders, albeit not one that has led to significant gains or outperformance in the past.
Good Performance Track-Record
RDVY's overall performance track-record is quite good, if not outstanding. The fund has outperformed most of its peers long-term, matching the S&P 500. Results are a bit over the place, but broadly positive. Fund performance has been particularly weak the past year, somewhat improved YTD.
RDVY's good performance is a benefit for the fund and its shareholders, although not a significant, or consistent one. Still, the fund has outperformed long-term, and that is definitely a positive.
Conclusion
RDVY's strong dividend growth track-record, cheap valuation, and good performance track-record make the fund a buy.