What is FTDS? (Pros, Cons, and Strategies)

The financial landscape is complex, and investors are continually seeking stable, long-term investment options that provide dependable returns. First Trust Dividend Strength ETF (FTDS) is gaining traction among those looking for consistent dividend income combined with the potential for modest appreciation. In this post, we'll delve into what FTDS is, along with its benefits, drawbacks, and strategies for optimizing its use.

What is FTDS?

FTDS stands for First Trust Dividend Strength ETF. This ETF seeks to provide investors with a reliable income stream through dividends while also offering an opportunity for capital appreciation.

FTDS tracks the Nasdaq US Dividend Achievers 50 Index, which focuses on companies with a history of increasing dividends consistently over time. Unlike ETFs that prioritize high dividend yields alone, FTDS targets firms that demonstrate fiscal health and long-term dividend growth.

Key Features of FTDS

• Companies with a minimum of five consecutive years of dividend increases
• Companies must meet strict liquidity requirements
• Firms are chosen based on financial health, not just dividend yield

After screening, the ETF selects the top 50 companies based on criteria such as earnings growth, return on assets, long-term debt to equity ratio, and dividend payout ratio.

FTDS Composition

FTDS includes well-established companies known for their strong dividend performance. The ETF is diversified across various sectors like consumer goods, technology, and healthcare, ensuring a balanced portfolio. Examples of holdings might include names like Johnson & Johnson (JNJ), Microsoft (MSFT), and Procter & Gamble (PG).

Pros of FTDS

Steady Dividend Growth

One of the primary attractions of FTDS is its consistent dividend growth. Over the years, the ETF has maintained a reliable record of increasing dividend payouts, a crucial factor for long-term investors. This steady growth appeals to those planning their retirements or seeking dependable income streams.

Diversification Across Strong Sectors

FTDS is well-diversified, investing in various sectors to spread risk and provide stability. This diversification means investors are not overly exposed to the volatility of a single industry, ensuring a more balanced approach.

Focus on Financially Healthy Companies

By focusing on firms with robust financial metrics, FTDS minimizes the risk of dividend cuts. Metrics like earnings growth and debt to equity ratio ensure that only financially sound companies make the cut, reducing the risk associated with dividend investing.

Cons of FTDS

Moderate Dividend Yield

While FTDS offers steady dividend growth, its yield is relatively moderate compared to high-yield dividend ETFs. For example, ETFs targeting high-yield sectors can offer dividends exceeding 6%, whereas FTDS typically offers yields in the 2-3% range. This may not be appealing to investors seeking immediate high income.

Not Ideal for Short-term Investors

FTDS is designed for long-term investment horizons. Short-term investors looking for rapid gains may find other ETFs more suitable. The benefits of FTDS, including dividend growth and compound returns, become more apparent over longer periods, typically 10 years or more.

FTDS Investment Strategies

FTDS offers unique advantages as a dividend ETF, particularly for those focused on long-term growth and stability. Here's how you can effectively incorporate FTDS into your investment strategy.

Long-term Investment Strategy

To maximize the benefits of FTDS, consider a long-term investment horizon—at least 10 years. The consistent dividend growth and stable price appreciation serve long-term goals well, making it ideal for retirement planning or achieving substantial growth over time.

Dollar-Cost Averaging

One effective strategy is dollar-cost averaging, where you invest a fixed amount into FTDS at regular intervals. This approach mitigates the risk of market volatility and allows you to build a significant position over time, leveraging both high and low price points.

Dividend Reinvestment

To take full advantage of compound interest, reinvest the dividends you receive from FTDS. Over time, this reinvestment can significantly increase your total returns. Automated dividend reinvestment plans (DRIPs) offered by most brokers can simplify this process and help your investments grow more quickly.

Conclusion

FTDS is a robust option for investors seeking a reliable dividend income and long-term growth. While it may not offer the highest dividend yield on the market, its strategy of focusing on financially sound companies with a history of steady dividend increases provides stability and peace of mind. By adopting strategies like long-term investment, dollar-cost averaging, and dividend reinvestment, you can make the most of what FTDS has to offer and ensure a stable financial future.