Just one of more than 340 U.S. dividend ETFs has beaten the S&P 500 over the past decade, and it did so by sacrificing the very thing investors expect: a high yield.
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How 1 dividend ETF beat the S&P 500 by giving up yield
The $22 billion First Trust Rising Dividend Achievers ETF (RDVY) is the sole U.S. dividend fund to outperform the S&P 500 over the last decade, posting a 15.8% annual return by prioritizing dividend growth over current yield.
"Philosophically, if you are investing in stocks as opposed to bonds, you want some level of growth," says Ryan Issakainen, an ETF strategist at First Trust. "This gives you the potential, five or 10 years from now, to get a raise along the way."
The fund's 15.8% annual return through May 8 narrowly beat the S&P 500's 15.6% gain over the same period. However, its dividend yield is just 0.9%, below the S&P 500's 1% and the 2.6% average for dividend ETFs, according to data from Morningstar.
This performance highlights a crucial split in asset management strategy: funds focused on dividend growth, often with heavy tech exposure, can produce superior total returns, while those targeting high current income may lag in bull markets. For investors, the choice depends entirely on their need for immediate cash flow versus long-term capital appreciation.
A Strategy Built on Growth, Not Yield
The First Trust fund bolstered its performance by leaning into market trends, particularly technology. Its methodology seeks companies that not only hike their dividends but also show healthy earnings growth and high levels of cash relative to debt. This has resulted in a portfolio heavy with semiconductor equipment manufacturers like Lam Research, Applied Materials, and KLA, all of which have seen share prices climb more than 100% in the past 12 months. Alphabet and Nvidia are also top 10 holdings.
While this strategy has delivered standout total returns, it does not reward investors with income. The fund's dividend growth has been strong, averaging 15% annually over the past three years compared with 12% for the S&P 500. Yet, the starting yield is lower than the broader market. The fund also carries a relatively high annual expense ratio of 0.47%, a significant cost compared to its cheaper rivals.
The Income Investor's Dilemma
For investors who need to live off their portfolio's income, the trade-off may be too steep. "If you are focused on yield, this is not the right ETF for you," says Aniket Ullal, head of ETF research at CFRA.
Investors looking for a less extreme version of the dividend growth strategy have other options. The $125 billion Vanguard Dividend Appreciation ETF (VIG) offers a 1.5% yield and has returned 13% annually over the past decade, with a low 0.04% fee. Similarly, the $39 billion iShares Core Dividend Growth ETF (DGRO) yields 2% and has returned 13.2% annually over the same period for just 0.08%.
For those who prioritize income above all, a different strategy is required. The Schwab U.S. Dividend Equity ETF (SCHD) offers a compelling alternative, yielding roughly 4.1%. It screens for companies with a long history of dividend payments and strong cash-flow metrics, making it a popular choice for retirees. While its total return has slightly trailed the most aggressive growth-focused funds, its substantial income generation and competitive long-term performance make it a cornerstone for income-oriented portfolios.
This article is for informational purposes only and does not constitute investment advice.
