2023-04-20 13:19:22 ET
Summary
- RDVY invests in a basket of Nasdaq-listed stocks with a recent history of increasing both dividends and earnings.
- In a slowing economy, dividends may account for a larger portion of total equity returns.
- I rate RDVY as a Buy and believe it could outperform in the event of further economic contraction.
I recently initiated a position in my own account in First Trust Rising Dividend Achievers ETF (RDVY), which tracks the NASDAQ US Rising Dividend Achievers Index, a diversified basket of 50 dividend-paying stocks. Companies must meet cash-to-debt and payout ratio thresholds to be eligible. Specifically, a company must have increased dividends every year for the past 5 years and also increased its earnings over each of the past 3 years. While the Nasdaq is best known for the dominance of the FAANG stocks, many Nasdaq-listed companies are much weaker businesses. So, RDVY filters through that and raises the bar for quality significantly.
The methodology of RDVY focuses on dividend growth, not on the highest yielding stocks. In this sense, it follows the theme known to investors as “dividend aristocrats,” though these stocks do not have the dividend growth tenure that classic aristocrat companies do. This should reduce the risk of dividend cuts, as this ETF’s process punishes high-yielders if they aren’t also growing earnings consistently.
Additionally, with growth in the equity market slowing and the cost of capital rising, dividends may become a more significant portion of total returns. Investors are beginning to see the risks of high-multiple stocks, and dividend-paying stocks, which are traditionally seen as value stocks, may become more popular. This could support the returns of RDVY. Furthermore, companies that pay dividends are often more mature and stable than those that do not. This stability could cushion the downside of RDVY in the event of an economic downturn.
RDVY primarily invests in financials, but it also diversifies its holdings across multiple sectors such as industrials, energy, basic materials, and technology. All the companies in this ETF are domiciled in the United States, which limits its sensitivity to other countries but increases its sensitivity to the US market. Slightly over 20% of the entire fund is accounted for by the top 10 holdings, and just over half is represented by the top 25 holdings. With such a well-diversified portfolio, this ETF has relatively low concentration risk.
Recent Highlights
RDVY outperformed the S&P 500 over the trailing 1 year, trailing 3 years, and since RDVY’s inception in January 2014. RDVY's criteria and methodology lead to a heavy weighting in Financials and Industrials. The Financial sector has been crushed by recent bank failures and concerns about the stability of regional banks. This led RDVY to underperform the S&P 500 YTD, with significant underperformance in March driven by regional bank failures.
Current Bull Case
RDVY’s yield pales in comparison to bonds. However, unlike bonds, dividend-paying stocks have the potential to grow in price. This means RDVY can provide both income and capital appreciation from dividend-paying stocks. RDVY is a diversified way to gain equity exposure, not a bond alternative.
It may be lost on a generation of investors who have experienced a strong decade of stock market price growth, but dividends can be a meaningful part of total return. In fact, in the 1940s and 1970s, periods with high inflation, dividend income accounted for more than one-half of the total return of the S&P 500.
Dividend Income as a Percent of Monthly Total Return of the S&P 500 (S&P Dow Jones Indices LLC)
Current Bear Case
RDVY will likely underperform in a strong bull market, particularly if its low-yielding, mega-cap Nasdaq brethren are leading that market growth, as they did for much of the past 10 years. And, if the market were to recover more quickly than expected RDVY’s returns could suffer. RDVY is also heavily invested in the financial sector, which could be negatively impacted if problems in the banking sector spread to other parts of the financial sector. That is as big a near-term risk as any I can identify.
Price Trend Analysis
RDVY currently has a sideways trend in both its short-term and long-term exponential moving average lines. This horizontal price movement typically occurs before the price continues a prior trend or a potential reverse into a new trend. RDVY has underperformed YTD, but the ETF may be reversing into an upward trend supported by demand for more value-oriented ETFs.
Current Investment Opinion
I am using RDVY to generate total return and to capitalize on value opportunities in the current environment. Thus, I rate RDVY as a Buy. However, RDVY is not the solution for someone just looking for high yield nor is this ETF without risks.
For further details see:
RDVY: Dividend Growth Spin On Nasdaq Stocks May Pay Off In This Market