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New ETF Targets Dividend Growth

Stocks in this article: KO NOBL SDY

NEW YORK (TheStreet) -- Exchange-traded fund provider First Trust is betting that dividends still matter with the launch this week of its First Trust Nasdaq Dividend Achievers ETF (RDVY). Despite the fund's name it is not comprised solely of Nasdaq stocks. Nasdaq is simply the index provider.

The big idea is that RDVY is built with stocks with favorable dividend growth and favorable fundamental factors.

More specifically, the methodology screens the 1,000 largest domestic companies by market cap and volume for dividend increases, earnings increases, a cash to debt ratio greater than 50% and a dividend payout ratio not to exceed 65%. The 50 companies that score most favorably are included in the fund but RDVY excludes real estate investment trusts.

By including above-mentioned fundamental factors in addition to a track record of dividend growth, First Trust believes RDVY will more successfully capture companies more likely to be able to keep growing their dividends than funds that rely solely on looking backwards at dividend growth.

First Trust provides data from Ned Davis Research that shows dividend growers and initiators, the tag line for the types of companies that meet the fund's requirements, had an average annual return on 9.5% from 1972 to 2012, which is better than dividend payers that don't increase their dividend, non-dividend payers and companies that cut their dividends. The growers and initiators also had a lower standard deviation than the other groups.

While the fund clearly targets a dividend-oriented strategy that does not mean it will necessarily have a high yield but companies with long track records of dividend growth have tended to outperform the broad market on a price basis.

Although it is too soon for any reliable dividend yield information the sector makeup gives the impression that the yield will not be too high. Remember that the screening process considers growth of dividends not yields.

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