Illinois-based provider of exchange-traded funds First Trust has introduced its first fund in 2014, adding to its lineup of dividend exchange-traded funds with the launch of its First Trust NASDAQ Rising Dividend Achievers Fund (RDVY). Although 2013 turned out to be a disappointing year for income strategies, demand for yield focused funds remained robust, which probably explains why First Trust chose to launch a fund with a twist in this already overcrowded space.
RDVY tracks the NASDAQ US Rising Dividend Achievers Index, a benchmark that focuses on 50 companies with a history boosting their payouts. Also, companies need to show the potential of raising dividends in the future to be included in the index.
To achieve this, a firm’s earnings growth, levels of cash reserve compared to debt and the proportion of dividend payouts are screened first. Firms with a history of growing dividend payouts and earnings per share, along with a cash-to-debt ratio higher than 50 percent and a trailing 12-month payout ratio below 65 percent make it to the benchmark.
Research shows companies that initiated or consistently raised dividends from 1972 through 2012 delivered better returns and were less volatile than the companies that didn’t pay or cut dividends.
The index is rebalanced quarterly and reconstituted annually. The constituent stocks are equally weighted initially and on each rebalancing date. Most of the 50-stock members are familiar names with multi-decade dividend growth histories including blue-chips like Coca-Cola, Boeing, Intel and Exxon Mobil Corporation. The index bets big on the technology sector for future dividend growth, evident from the sizable allocation to Cisco, Apple, Oracle, Qualcomm, ADP Inc. and Accenture.
RDVY has an annual expense ratio of 0.5 percent.
The fund is expected to face formidable competition from well-entrenched products like the Vanguard Dividend Appreciation ETF (VIG) and the SPDR S&P Dividend ETF (SDY). Both the products have more than $10 billion in assets and are cheaper than RDVY (annual fees of 0.1 percent and 0.35 percent, respectively).
Disclosure: No holdings