Why First Trust’s FDL ETF Is the Safest Way to Invest for Dividends Today

Income-focused investors can take the time and trouble to pick individual stocks, or they can just buy an exchange traded fund (ETF) and make the process much easier. If safety is your priority but you also like to see cash dividends in your account, you definitely should check out the First Trust Morningstar Dividend Leaders Index Fund (NYSEARCA:FDL).

First Trust’s fund adds a cushion of safety because of its hefty dividends, but there’s more to the story. With the First Trust Morningstar Dividend Leaders Index Fund, you’ll get exposure to dividend champions that are rock-solid companies across a wide variety of market sectors.

I understand that recent news headlines might make you fearful of price volatility in stocks. You don’t have to stay out of the financial markets completely, though, as owning the First Trust Morningstar Dividend Leaders Index Fund is absolutely the safest way to stay in the game while collecting consistent dividend payments.

What’s in the FDL ETF?

The first thing you need to know about the First Trust Morningstar Dividend Leaders Index Fund is that it tracks Morningstar’s Dividend Leaders Index. This is based on a proprietary screening model, and it focuses on companies that have “historically maintained consistent and sustainable dividend policies.”

You can feel safe about the First Trust Morningstar Dividend Leaders Index Fund because the fund’s managers are highly selective. A company is excluded from the FDL ETF if its “five-year indicated dividend per share growth is less than zero” or if its “one year estimated earnings per share divided by its indicated dividend per share is less than or equal to one.”

Don’t let the fancy formulas scare you away. What’s important is that the First Trust Morningstar Dividend Leaders Index Fund filters out the less-than-stellar dividend payers and only includes reliable income earners and dividend growers.

Furthermore, it’s a diversified fund with 95 holdings. While the S&P 500 and NASDAQ 100 are dominated by technology firms, you’ll find that the top holdings in the FDL ETF come from a variety of market sectors.

Among the top holdings of the First Trust Morningstar Dividend Leaders Index Fund are Verizon Communications (NYSE:VZ) (8.43% of FDL’s weighting), Abbvie (NYSE:ABBV) (7.81%), Chevron (NYSE:CVX) (7.32%), and Philip Morris International (NYSE:PM) (6.81%). 

You can’t get much more diversified than that. Regarding tech sector exposure, the FDL ETF includes International Business Machines (NYSE:IBM) (4.38% of the fund’s weighting) and not much else. However, that’s not a shortcoming of the fund since large-cap technology firms typically don’t pay big dividends.

What’s the FDL ETF’s Dividend Yield?

Now, it’s time to answer the billion-dollar question: What is the First Trust Morningstar Dividend Leaders Index Fund’s dividend yield? Income seekers will be glad to know that the fund offers a forward annual dividend yield of 4.18%.

That’s a decent-sized cash cushion during these unpredictable times. Yet, the skeptics might point out that investors will have to pay a management fee to get access to those dividend payouts.

This is true, but the First Trust Morningstar Dividend Leaders Index Fund’s annual expense ratio (a fund management fee that’s automatically deduced from the share price) isn’t exorbitant. Specifically, the FDL ETF’s expense ratio is 0.45% per year, which translates to 45 cents for every $100 invested in the fund.

Therefore, the First Trust Morningstar Dividend Leaders Index Fund’s dividend distributions will more than make up for the fund’s management fees. When all is said and done, safety-minded investors are getting a great deal with the FDL ETF.

A Stable Source of Dividends

Finally, we need to address the topic of price stability, which is part of an asset’s safety profile. If the First Trust Morningstar Dividend Leaders Index Fund is highly volatile, then it won’t pass my safety inspection.

Here’s a fact that might surprise you during these turbulent times. Over the past six months, the First Trust Morningstar Dividend Leaders Index Fund has actually outperformed the S&P 500.

That’s not including the dividend payments, by the way. If dividends were included, the performance gap between the FDL ETF and the S&P 500 would be even wider.

I’m using the past six months because this is a good litmus test for the stability of the First Trust Morningstar Dividend Leaders Index Fund. There’s been a great deal of stock-price volatility this year, yet the FDL ETF was just as stable as the S&P 500, or even more so.

This just goes to show that investors can feel safe when they carefully choose a broad mix of well-established dividend deliverers. Fortunately, you don’t have to pick out these companies yourself because you’ll get a full package of diversification, stability, and yield with the First Trust Morningstar Dividend Leaders Index Fund.

The post Why First Trust’s FDL ETF Is the Safest Way to Invest for Dividends Today appeared first on 24/7 Wall St..