ETFs with a forward focus are the preference of Ryan Issakainen, an exchange-traded fund strategist for First Trust Advisors. "It's important to consider equity income strategies that have a way to identify companies that are well-positioned to increase dividends," he said.
Issakainen likes the methodology used by the First Trust Value Line Dividend Index Fund (FVD) in selecting dividend paying companies. "It uses Value Line's safety ranks," he said. "Built into its safety rankings is an evaluation of a company's fundamental health."
Issakainen says this consideration is a better predictor of the future than past dividends. "It's really what ends up being determinative of whether a company is going to be able to maintain and perhaps grow its dividends in the future," he said. "More importantly it helps to identify companies that might have to cut their dividends."
Those saving for retirement should pay careful attention to the sector allocation of their portfolios. "The vast majority of equity dividend focused ETFs tend to be underweight tech stocks," Issakainen said. "Most dividend indexes have rules that require a company to have raised or paid dividends over a very long period of time." Issakainen says the First Trust NASDAQ Technology Dividend Index Fund (TDIV) can serve as an ideal complement for retirement savers looking to build a well-balance portfolio. "The technology sector represents the largest contributor of dividends of any sector in the S&P 500," he said. "That's the case, because the tech sector has grown its dividends at a rate of right around 20% for the last five or six years."