2023-04-17 05:57:14 ET
Summary
- RDVY witnessed a dividend cut for almost 10 quarters. However, since 2019, the pay-out has witnessed a healthy growth, despite the covid-19 pandemic.
- RDVY at present has a low yield, but generated a strong (almost 15 percent) annual average total return over a period of time, despite a very poor 2022.
- RDVY’s diversified portfolio of large-cap stocks has a history of increasing earnings, dividend growth, strong cash balances and relatively low debt.
- RDVY’s portfolio has high volatility and is highly concentrated in the financial sector, a sector that failed to generate impressive growth recently.
~ by Snehasish Chaudhuri, MBA (Finance)
First Trust Rising Dividend Achievers ETF ( RDVY ) is an exchange traded fund that generates low yield but a very strong annual average total return over a period of time. Annual average total return between 2016 and 2021 was 19.5 percent. Even a poor 2022 could not bring this average down enough to demotivate growth-seeking investors. Average return still stood around 15 percent. This ETF primarily invests in dividend paying growth and value stocks of large-cap firms. RDVY consists of 50 stocks which are quarterly rebalanced, assigning equal weight to all those stocks. Due to this equal weightage, risks related to individual stocks are low. However, the fund is quite concentrated in financials, a sector though lucrative, bears high risk.
RDVY Offers Quarterly Pay-out, Strong Dividend Growth, But a Low Yield
First Trust Rising Dividend Achievers ETF seeks to track the performance of the NASDAQ US Rising Dividend Achievers Index, by using full replication technique. The index is designed to provide access to a diversified portfolio of large-capitalization stocks with a history of increasing earnings, dividend growth, strong cash balances and relatively low debt. The fund has an expense ratio 0.5 percent and a significantly large asset base of $7.9 billion. RDVY's portfolio looks superior to its benchmark in terms of quality of holdings. The fund offers quarterly pay-out and has a trailing-twelve-months yield of 2.25 percent . Such a low yield certainly isn't good enough for income seeking investors, despite a consistently strong annualized dividend growth .
RDVY Creates a Diversified Portfolio Through an in-depth Filtering Process
First Trust Rising Dividend Achievers ETF has a portfolio of 50 stocks. As per the index description, in order to be eligible , a stock must rank among the top 1,000 market capitalizations in the NASDAQ, its last fiscal year EPS should be greater than that of 3 prior fiscal years, have an average daily trading volume of at least $5 million, have a cash-to-debt ratio above 50 percent, and have a trailing-twelve-month retention ratio above 35 percent. These stocks are then ranked by their 5-year dividend growth rate, by their dividend yield and by their retention ratio. 50 such best-ranked companies or stocks are then included in the portfolio and assigned equal weightage. RDVY reconstitutes its portfolio annually and rebalances it on a quarterly basis.
RDVY's Portfolio is Quite Volatile and Has Been Valued Reasonably Right
First Trust Rising Dividend Achievers ETF was launched on January 6, 2014 by First Trust Advisors L.P. Almost 40 percent of assets are invested in the financial sector. Another 40 percent of its assets are invested in information & communication technology (ICT), energy and healthcare sectors. The fund has a turnover ratio of 59 percent. Its investment strategy is built on the assumption that promising dividend paying stocks should generate meaningful returns. The fund is currently trading at a Price to earnings (P/E) of 10.03 with historical sales and cash flow growth of 19.74 percent and 44.71 percent, respectively. However, on the negative side, RDVY has a relatively volatile portfolio and is highly concentrated on the financial sector.
RDVY's Portfolio Consist of Financial, Energy, ICT & Healthcare Stocks
Out of 50 stocks in RDVY's portfolio , 20 are from the financial sector, and it encompasses every sub-segment of this sector. These stocks are Popular, Inc. ( BPOP ), MGIC Investment Corporation ( MTG ), Capital One Financial Corporation ( COF ), Huntington Bancshares Incorporated ( HBAN ), Aflac Incorporated ( AFL ), The Goldman Sachs Group, Inc. ( GS ), Visa Inc. ( V ), Discover Financial Services ( DFS ), Equitable Holdings, Inc. ( EQH ), Principal Financial Group, Inc. ( PFG ), Regions Financial Corporation ( RF ), American Express Company ( AXP ), Mastercard Incorporated ( MA ), JPMorgan Chase & Co. ( JPM ), Bank of America Corporation ( BAC ), Morgan Stanley ( MS ), Synchrony Financial ( SYF ), The PNC Financial Services Group, Inc. ( PNC ), Comerica Incorporated ( CMA ) and Citizens Financial Group, Inc. ( CFG ).
As almost 40 percent of RDVY's assets are invested in ICT, energy and healthcare sectors, another 18 stocks belong to these three sectors. Energy stocks include Civitas Resources, Inc. ( CIVI ), ConocoPhillips ( COP ), Chord Energy Corporation ( CHRD ), Magnolia Oil & Gas Corporation ( MGY ), Exxon Mobil Corporation ( XOM ), and Chevron Corporation ( CVX ). ICT stocks like Accenture plc ( ACN ), Microsoft Corporation ( MSFT ), Cognizant Technology Solutions Corporation ( CTSH ), Micron Technology, Inc. ( MU ), NetApp, Inc. ( NTAP ), Cisco Systems, Inc. ( CSCO ), Texas Instruments Incorporated ( TXN ), and Lam Research Corporation ( LRCX ) are currently part of RDVY's portfolio. Abbott Laboratories ( ABT ), Humana Inc. ( HUM ), Elevance Health, Inc. ( ELV ), and Pfizer Inc. ( PFE ) are the only investments in the healthcare sector.
Price Performance of Energy, ICT and Healthcare Stocks Was Quite Decent
How did stocks from the financial sector perform in the recent past? Well, not at all impressive. During the past one year, only three stocks - JPM, MTG and V were able to register a price growth in excess of 5 percent. The scenario is nothing different during the past three months, as again only three stocks - MTG, AXP and V were able to register positive price growth. Stocks from energy, ICT and healthcare sectors performed relatively better. During this year, barring CVX, ELV, COP and ABT, all other stocks registered a positive price growth. CIVI grew by 35 percent, whereas MU, LRCX and MSFT registered a price growth in excess of 20 percent. Price of DVY, meanwhile, grew by 4.25 percent. During the past 12 months also, eight stocks - XOM, CIVI, HUM, LRCX, COPTXN, MSFT and CVX registered positive price growth.
Investment Thesis
In the ultra-low-yield environment, solid dividend stocks are perhaps the only meaningful way to address the inflation problem that eats into shareholders' wealth. In this regard, stocks that have a consistent history of generating dividend growth look unprecedentedly attractive, as they can not only offer inflation protection but also allow to build a long-term durable income stream. First Trust Rising Dividend Achievers ETF is one such fund which is generating considerable dividend growth. RDVY witnessed a dividend cut for almost 10 quarters in between Q3, 2016 and Q4, 2018. However, since 2019, the pay-out has witnessed a healthy growth, despite the covid-19 pandemic.
RDVY at present has a low yield, but generated a very strong annual average total return over a period of time. Despite a poor 2022, annual average total return still stood around 15 percent. Its diversified portfolio of large-cap stocks has a history of increasing earnings, dividend growth, strong cash balances and relatively low debt. RDVY's portfolio looks superior to its benchmark in terms of quality of holdings. The negatives about this fund is that it is highly concentrated on the financial sector, a sector that failed to generate impressive growth in the recent past. Investors who are looking for a large-Cap ETF that picks high-quality stocks with massive cash flow should definitely consider investing in First Trust Rising Dividend Achievers ETF.
For further details see:
RDVY: Low-Yielding Large-Cap ETF Generating Strong And Consistent Total Returns