When it comes to generating passive income, it’s easy to fall for the lure of high-yield dividend stocks but there’s often a catch with those eye-popping yields. Sometime, they signal companies that have maxed out their growth potential and are simply returning excess cash because they don’t have better places to put it.
That’s why seasoned investors sometimes prefer a different route, one that prioritizes dividend growth over sheer size of payouts.
In other words, instead of asking “How big is the dividend?” they ask “How fast is it growing?” And that’s where the First Trust Rising Dividend Achievers ETF (ticker: RDVY) steps in.
Let’s unpack what’s under the hood, and whether this fund deserves a spot in your portfolio.
Key Points
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RDVY targets companies with rising dividends and earnings, not just high yields.
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It has outperformed peers in total returns but pays a modest 1.67% yield with higher fees.
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Suited for investors seeking growth and income, not ideal for retirees needing high payouts.
What RDVY Looks for in a Stock
Rather than blindly chasing yield, RDVY is built on a smart foundation, which is the Nasdaq US Rising Dividend Achievers Index.
It filters for just 50 U.S. stocks that hit a high bar in four areas, including:
Proven Track Record – Companies must have grown their dividend over both the last three and five years.
Earnings Momentum – Current earnings per share must beat what the company earned three years ago.
Financial Strength – Firms need to maintain a cash-to-debt ratio above 50% and keep their payout ratio below 65%.
Liquidity & Size – Eligible stocks must be among the 1,000 largest on the Nasdaq and average at least $5 million in daily trading volume.
And one more distinction is REITs are excluded. The idea here is to avoid interest-rate-sensitive sectors and focus on operating companies with solid fundamentals.
Rather than overhauling its lineup all at once, RDVY gradually swaps out about a quarter of its holdings each quarter. That gives the fund a chance to stay fresh without creating unnecessary churn.
So who makes the cut? As of now, some of the biggest names in the portfolio include Meta Platforms, Microsoft, JPMorgan Chase, eBay, and Bank of New York Mellon, all large, well-run businesses with room to grow.
What RDVY Doesn’t Do Well?
The current yield sits at just 1.67%. That’s well below the 3.97% yield you’d get from something like the Schwab U.S. Dividend Equity ETF (SCHD), which focuses on more traditional, slower-growing dividend payers.
The other knock is RDVY isn’t cheap. With an expense ratio of 0.48%, it’s significantly pricier than many peers, SCHD charges just 0.06%, for example.
And because it tilts toward growthier names, the ride can be a bit bumpier than what conservative income investors might be used to.
In short if you’re a retiree looking to live off dividends, RDVY might not pay the bills.
Where RDVY Shines
Now for the good news. While RDVY doesn’t lead in yield, it has crushed many of its competitors when it comes to total return.
Over the past 10 years, the ETF has delivered a price return of 170%, and a total return (with dividends reinvested) of 224%. That’s a hefty edge over SCHD, which posted a total return of 179% over the same stretch.
Even heavyweights like the Vanguard Dividend Appreciation ETF (VIG) and the iShares Core Dividend Growth ETF (DGRO) haven’t managed to keep up.
The outperformance stems from the fact that RDVY isn’t just about dividends, it’s about growth. By focusing on companies that are growing earnings and steadily raising payouts, the fund captures capital appreciation alongside income. That’s a formula that has worked remarkably well.
Should You Buy RDVY?
If your goal is steady monthly income to fund your retirement, RDVY probably isn’t your go-to. The yield’s too low, and the higher volatility won’t sit well with conservative investors.
But if you’re still building wealth and want a mix of income and growth, without falling into the trap of yield-chasing, this ETF deserves a closer look. It offers exposure to financially sound businesses with proven track records of growing their dividends and earnings, even if you have to pay a little more in fees to get it.
Just know what you’re buying because RDVY is not your grandfather’s income fund. It’s more like a growth fund in dividend clothing, and for many investors, that might be a smart twist on an old strategy.