If you own an S&P 500 fund, you might want to consider replacing it with this better-performing dividend-stock fund

MW If you own an S&P 500 fund, you might want to consider replacing it with this better-performing dividend-stock fund

By Philip van Doorn

The First Trust Rising Dividend Achievers ETF selects quality dividend stocks while spreading risk evenly

Most investors are aware that active money managers are hard-pressed to match the performance of broad -- and inexpensive -- index funds. But what would you say if you were offered an exchange traded fund that takes less risk than the S&P 500 but has outperformed it?

The First Trust Rising Dividend Achievers ETF $(RDVY)$ holds 50 stocks -- it is equally weighted, with the portfolio reconstituted annually and rebalanced each quarter.

Here's how it has performed over the past five years against the SPDR S&P 500 ETF $(SPY.AU)$, which tracks the benchmark S&P 500 , and the Vanguard Total Stock Market ETF $(VTI.AU)$, which has also beaten the S&P 500:

The First Trust Rising Dividend Achievers ETF is rated five stars (the highest) by Morningstar and has $5.1 billion in assets under management. The SPDR S&P 500 ETF has about $386 billion in assets, and the Vanguard Total Stock Market ETF has about $264 billion.

When the First Trust Rising Dividend Achievers ETF reconstitutes its portfolio each March, it begins with the 1,000 largest U.S.-listed companies (excluding real estate investment trusts), with average trading volume of at least 5 million shares over the previous three months.

Companies eligible to be held by the fund must meet these criteria:

The companies are then ranked by a combination of dividend increases over the previous five years, current payout ratio and current dividend yield. The 50 with the best scores make up the portfolio, restricting any one sector to 30% of the weighting.

This approach of selecting "quality" dividend growers is far less concentrated than the S&P 500 because of the equal weighting. Most broad indexes are weighted by market capitalization. This means the five largest companies in the SPDR S&P 500 ETF (Apple Inc. $(AAPL)$, Microsoft Corp. $(MSFT)$, Amazon.com Inc. $(AMZN)$, Facebook Inc. (FB) and both share classes of Alphabet Inc. $(GOOGL)$(GOOGL)) make up 22% of the SPDR S&P 500 ETF. Among those five, Apple and Microsoft are held by the First Trust Rising Dividend Achievers ETF.

Digging into the portfolio

Among the 50 stocks held by the First Trust Rising Dividend Achievers ETF, 24 have current dividend yields higher than 2.00%, which compares to a weighted aggregate dividend yield of 1.35% for the S&P 500, according to FactSet. That said, the focus for the ETF isn't dividend income, it is long-term growth -- the ETF itself pays a small quarterly dividend, for a yield of less than 1%.

An important factor in the ETF's stock selection is five-year growth of quality dividends -- those well-covered by cash flow. This points to something that may fascinate long-term investors: The correlation with a growing dividend and long-term performance. If you hold a group of individual stocks that fit the bill, you can even build a solid dividend income stream years down the line, while also going for growth.

Here's a screen of the 50 stocks held by the First Trust Rising Dividend Achievers ETF, highlighting growth of dividends and rising dividend yields.

Starting with the 50 stocks held by the fund, here are the 24 that had dividend yields of at least 2.00% five years ago. The list is sorted by the compound annual growth rate (CAGR) for dividends over the past five years. It also shows the higher yield for an investor who bought those shares five years ago, based on the price they paid then:

Company
Five-year dividend CAGR
Dividend yield on shares purchased five years ago
Dividend yield -- five years ago
Current dividend yield for a new investor
Price change -- 5 years
Total Return -- 5 Years 
Morgan Stanley MS
28.5%
9.60%
2.74%
2.68%
259%
305% 
$Bank of America Corp(BAC-N)$. BAC
22.9%
5.63%
2.01%
1.99%
183%
212% 
Texas Instruments Inc. TXN
21.8%
5.84%
2.18%
2.17%
169%
207% 
NetApp Inc. NTAP
21.4%
7.03%
2.67%
2.41%
192%
233% 
Best Buy Co. Inc. BBY
20.1%
8.03%
3.21%
2.37%
239%
287% 
PNC Financial Services Group Inc. PNC
17.8%
5.88%
2.59%
2.59%
128%
163% 
Fidelity National Financial Inc. FNF
13.8%
6.01%
3.15%
3.28%
83%
115% 
JPMorgan Chase & Co. JPM
13.4%
5.51%
2.94%
2.23%
148%
184% 
Automatic Data Processing Inc. ADP
11.9%
4.13%
2.35%
1.73%
138%
166% 
Air Products and Chemicals Inc. APD
11.8%
4.33%
2.48%
2.16%
100%
126% 
Anthem Inc. ANTM
11.7%
3.47%
2.00%
1.23%
182%
202% 
Hartford Financial Services Group Inc. HIG
10.8%
3.49%
2.10%
2.06%
70%
90% 
Aflac Inc. AFL
10.0%
3.63%
2.26%
2.30%
58%
78% 
Williams-Sonoma Inc. WSM
9.8%
4.37%
2.74%
1.44%
203%
247% 
Honeywell International Inc. HON
9.3%
3.37%
2.15%
1.60%
110%
134% 
HP Inc. HPQ
9.3%
5.43%
3.47%
2.55%
113%
148% 
Microsoft Corp. MSFT
9.2%
3.87%
2.49%
0.77%
400%
443% 
Apple Inc. AAPL
9.1%
3.25%
2.11%
0.59%
451%
487% 
Cisco Systems Inc. CSCO
7.3%
4.79%
3.37%
2.62%
83%
114% 
Cummins Inc. CMI
7.2%
4.58%
3.24%
2.43%
89%
117% 
Intel Corp. INTC
6.0%
4.02%
3.01%
2.60%
55%
76% 
Qualcomm Inc. QCOM
5.1%
4.41%
3.44%
1.85%
138%
181% 
Archer-Daniels-Midland Co. ADM
4.3%
3.36%
2.72%
2.39%
40%
64% 
MetLife Inc. MET
3.7%
5.42%
4.52%
3.06%
77%
112% 
Source: FactSet 

Click on the tickers for more about each company.

This list shows how high the yields would have grown for an investor who bought these stocks five years ago. It includes price changes, for an investor who didn't reinvest dividends and total returns for one who did.

If you are looking to build an income stream, a long-term approach my be better than focusing on current yield.

For long-term growth investors, the First Trust Rising Dividend Achievers ETF's stock-selection approach has worked out well, as its five-year return has been well above those of the S&P 500 and Vanguard's Total Stock Market ETF for five years.

Don't miss: 20 stocks for maximum growth as the world switches to clean energy

-Philip van Doorn

$(END)$ Dow Jones Newswires

August 16, 2021 08:47 ET (12:47 GMT)

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