💪Power Players of Future Dividends: RDVY Decoded

In today's investment landscape, marked by constant market volatility, dividend-focused strategies have become increasingly popular. While many investors seek stability in established dividend aristocrats, there's another worthwhile approach: investing in companies poised for future dividend growth. In this discussion, we will explore the First Trust Rising Dividend Achievers ETF RDVY ( ▼ 1.12% ) , which aims to capture this promising market segment.

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What is RDVY?

RDVY tracks the NASDAQ US Rising Dividend Achievers Index, which is designed to identify companies that have consistently increased their dividends and have the financial strength to maintain this trend. For investors looking for a balance between current income and future growth potential, RDVY presents an interesting investment opportunity that deserves closer consideration.

What sets RDVY apart is its multifactor screening process: to qualify for inclusion in this ETF, companies must meet these specific criteria:

1. 📈Proven Dividend Growth: Companies must have increased their dividends in the past twelve months compared to the amounts paid three and five years ago.

2. 🤑Earnings Growth: Companies must show positive earnings per share in the last fiscal year that exceed the earnings per share from three fiscal years ago.

3. 📜Strong Balance Sheet: Companies must maintain a cash-to-debt ratio greater than 50%.

4. 💵Sustainable Payout Ratio: Companies must maintain a trailing twelve-month payout ratio of 65%.

The ETF selects the 50 stocks with the highest dividend yields from eligible companies. It is rebalanced quarterly to focus on companies with increasing dividend potential, eliminating emotional bias in stock selection.

Investment Strategy📊

RDVY can serve various roles within a diversified ETF portfolio. Here are several implementation strategies to consider:

• 💰Core Dividend Growth Holding: For investors seeking exposure to companies with dividend growth potential, RDVY can serve as a core holding. Its focus on financial strength and rising dividends makes it a suitable candidate for the dividend growth portion of a portfolio. Consider allocating 10-20% of your equity exposure to RDVY, complementing it with other ETFs focused on different factors or market segments.

• 💹Complement to High-Yield Dividend ETFs: RDVY works effectively alongside high-yield dividend ETFs. RDVY emphasises future income growth. A balanced approach might include:

  • 50% in high-yield dividend ETFs for current income

  • 50% in RDVY for dividend growth potential

• 🧩Sector Diversification Tool: RDVY's sector allocation typically differs from broad market indexes, with heavier weightings in financial, consumer discretionary, and industrials. Investors can use RDVY to adjust sector exposures within their portfolio, particularly for those seeking to reduce technology concentration in their core holdings.

Given RDVY's quarterly rebalancing, investors can add positions quarterly to align with the fund's reconstitution schedule. This approach can reduce the impact of market timing and potentially enhance long-term returns.

RDVY at a glance

ETF Issuer: First Trust

Inception: 2014-01-06

Asset Class: Equity

Underlying Index: Nasdaq US Rising Dividend Achievers Index

Geographical Focus: U.S.

Expense Ratio: 0.48% (as of last data point)

Dividend Yield: 1.65% (as of last data point)

Distribution Frequency: Quarterly

Historical Performance

Since its inception in 2014, RDVY has demonstrated competitive performance compared to broad market indexes and other dividend-focused ETFs. Let's examine RDVY's historical performance across different time frames and market conditions.

• Long-Term Performance: Since its inception, RDVY has delivered an annualised return of approximately 12.7%.

• Income Growth Performance: True to its name, RDVY has delivered on its promise of rising dividend payments. The fund's annual dividend payout has grown from $0.44 per share in 2015 to approximately $0.97 per share in 2024. This dividend growth rate has significantly outpaced inflation during this period.

ETF Radar View

The radar chart below shows the general characteristics of the ETF:

Top 3 Reasons to Invest

1. Forward-Looking Dividend Growth Approach: Unlike many dividend ETFs that focus solely on historical dividend streaks, RDVY employs a forward-looking methodology that identifies companies with a proven track record and the financial capacity to continue increasing dividends.

2. Built-In Quality Factor Exposure: RDVY's screening criteria, which focus on earnings growth, strong balance sheets, and sustainable payout ratios, effectively incorporate quality factor screening. Research shows that high-quality companies typically outperform in full market cycles, especially during market stress.

3. Sector Diversification Away from Technology Concentration: While major market indexes have become increasingly concentrated in large technology companies, RDVY typically maintains a more diversified sector allocation with significant exposure to financials, industrials, and consumer discretionary companies.

Top 3 Reasons Not to Invest

1. Higher Volatility Than Some Dividend Alternatives: RDVY's selection methodology, which includes a yield-weighting component and quarterly rebalancing, can result in higher portfolio turnover and volatility than more stable dividend growth ETFs.

2. Moderate Current Yield: Investors primarily focused on current income might find RDVY's yield somewhat disappointing. This moderate yield reflects RDVY's focus on future dividend growth rather than current income.

3. Concentrated Portfolio of Just 50 Stocks: RDVY's 50-stock portfolio is relatively concentrated compared to many broad-market or sector-specific ETFs. This concentration can increase single-stock risk, as each holding represents, on average, about 2% of the portfolio. Investors concerned about idiosyncratic stock risk prefer more broadly diversified dividend ETFs holding hundreds of stocks, thereby reducing the impact of any company's performance on the overall portfolio.

🚀Rising Dividend Superstars: The RDVY Opportunity

The First Trust Rising Dividend Achievers ETF is an attractive option for investors seeking companies with a strong history of dividend growth and the ability to continue increasing shareholder returns. It stands out from traditional dividend growth ETFs by focusing on forward-looking metrics rather than just historical dividend performance.

RDVY is particularly well-suited for:

• Investors seeking dividend growth rather than the maximum current yield

• Those looking to diversify away from technology-heavy core holdings

• Investors who appreciate the quality factor aspects of strong balance sheets and sustainable payout ratios

• Those with a medium to long-term investment horizon who can tolerate some additional volatility

Join the conversation about RDVY and other dividend growth strategies in the ETF UNO community. Share your experiences, ask questions, and connect with fellow investors. Remember, successful investing is best done together through shared insights.

Happy investing!

DISCLAIMER: This article is for informational purposes only and should not be considered as investment advice. Always conduct your own research and consult with a financial advisor before making investment decisions.