First Trust Advisors has launched the First Trust SMID Cap Rising Dividend Achievers ETF (Nasdaq: SDVY), providing exposure to a diversified portfolio of high quality US-listed income-producing equities from the small- and mid-cap segments of the market.
The fund provides a level of quality screening to select stocks with sustainable dividend payments.
The fund tracks the Nasdaq US Small Mid Cap Rising Dividend Achievers Index which looks beyond yield and analyzes the financial health of a company and its ability to maintain dividend increases by including a blend of historical and forward-looking factors to screen for high-quality dividend growers.
First Trust notes that high-quality dividends are often associated with larger, well-established companies. However, smaller companies with strong balance sheets and financial flexibility may also provide a good source of income as well as capital appreciation and dividend growth potential, the firm argues.
Ryan Issakainen, senior vice president, ETF strategist at First Trust, commented: “In our opinion, dividends are often a sign of strong corporate health, and dividend increases may signal growing confidence from management. While many dividend ETFs focus on large-cap stocks, we believe strong dividend policies are just as important for small- and mid-cap stocks. This ETF seeks to provide exposure to small- and mid-cap stocks that may be well-positioned for dividend growth.”
The index is composed of 100 small- and mid-cap companies with a history of raising their dividends and exhibiting the characteristics to continue to do so in the future. The methodology begins with the stocks in the Nasdaq US Mid Cap Index and the Nasdaq US Small Cap Index, excluding REITs.
To be eligible for inclusion in the index, companies must meet certain quality requirements: an increasing dividend in the trailing twelve-month period, positive earnings per share in the most recent fiscal year, increasing earnings per share over the past three years, a cash-to-debt ratio greater than 25%, and a trailing twelve-month period payout ratio no greater than 65%.
Eligible securities are then ranked by a combination of dollar dividend increase over the previous five year period, current dividend yield, and payout ratio. The 100 highest ranked securities are selected for inclusion in the index, and are equally weighted, subject to a maximum 30% sector cap, and a 75% cap on the mid-cap or small-cap size classification. The index is reconstituted annually and rebalanced quarterly.
The fund has a total expense ratio (TER) of 0.60%.
In the UK, there are several ETFs offering exposure to US equities with quality dividend characteristics. These include the iShares MSCI USA Quality Dividend UCITS ETF (QDIV LN) which, in addition to dividend yield, also screens companies for metrics associated with financial health and sustainable dividend payments. It has AUM of over $380m and a TER of 0.35%. Alternatively, the WisdomTree US Quality Dividend Growth UCITS ETF (DGRA LN) which invests in high yielding equities that have been screened for quality and growth characteristics. Its TER is 0.33% but the fund has AUM of just $5m.