PFM - PFM: A Decent Addition To Income Portfolios

2024-01-10 23:30:06 ET

Summary

• PFM focuses on publicly traded companies that depict a dividend growth quality.
• Some drawbacks are that the ETF has a high exposure to the Information Technology/Financials sectors and its expense ratio is high.
• Regardless, its performance has been relatively attractive and it has a solid distribution record.

Invesco Dividend Achievers ETF ( PFM ), launched in 2005 by Invesco, focuses on publicly traded companies that have increased their annual dividend for 10 or more fiscal years in a row.

Though this is a relatively small fund with a high expense ratio, it is nevertheless well established, has performed decently, and its distribution record is solid. Investors may want to explore some other similar ETFs before they make an investment decision.

Overview

As with any fund you consider including in your portfolio, it's prudent to know the basic information I compiled above in the table along with the following criteria the underlying index uses to select securities:

1. The issuer must be a constituent of the Nasdaq US Benchmark Index
2. It should have raised its yearly regular dividend payments for the past ten consecutive calendar or fiscal years
3. The shares must maintain a minimum average daily trading volume of $1 million over the last three months
4. The issuer must not have entered into any agreements that could potentially disqualify the security from being included in the Underlying Index
5. It should not be undergoing bankruptcy proceedings

Allocations & Cost

Let us now view the sectors the ETF is exposed to and the degree of that exposure. Predictably, PFM is mostly exposed to Information Technology due to the parent index the benchmark uses as its available universe:

That's a good time for me to remind you that this is a market cap-weighted ETF; for a more sophisticated weighting strategy that is based on a ranking system related to dividend characteristics, you might want to look elsewhere. PFM will most likely always have a large exposure to Information Technology and this implies a potentially lower average dividend yield than if it didn't.

This concentration also suggests that many of the fund's top holdings are going to belong in this sector:

Additionally, Financials is a big sector too and companies in it are usually very likely to pass the dividend-hike criterion; both are good reasons for explaining the almost equal exposure to it as well. Therefore, I believe it is reasonable to use the current allocation as a proxy for more or less what exposure you will have in the future.

Regarding the cost, the expense ratio is a bit high for such a simple approach to dividend stock investing at 0.53% in my view. Fortunately, the latest turnover was reported at 8% and though the ETF is not large, its 30-day average trading volume of 51,335 is acceptable.

Performance

When it comes to its performance, PFM has realized mediocre returns over the long run if compared to market ones. Here's how its returns compare to the price change of the Nasdaq Composite:

I think the above comparison is useful for investors who want to measure if the potential opportunity risk that is often realized when selecting dividend-focused instruments is worth the value such vehicles are likely to deliver.

Regardless, a fair judgment can only be exercised after you compare the performance of the ETF to that of similar ones over a long period. For this reason, I am showing you the relative performance of some of the biggest U.S. dividend stock ETFs based on AUM below:

As it appears, PFM has outperformed many of these multiple times bigger funds over time, and that's impressive. Sure, it has underperformed three of them, but not by a large enough margin to justify further digging as to potential reasons.

There is another check we must apply, however. PFM's 12-month distribution yield is currently at 2.07%. This is what more or less what such funds provide these days, so what matters more here is a long distribution record that depicts growth. PFM has that:

Risks

Before we wrap this up, let us view some of the most important risks that come with investing in PFM:

• Concentration in the Information Technology sector can affect the ETF's performance significantly if the companies belonging to it experience an overall decline in their stock prices.

• Market cap weighting may offer an accurate representation of the market the ETF wants exposure to, but it practically follows a buy-high-sell-low approach which leaves you exposed to risks that come with owning overvalued stocks.

• Dividend-oriented ETFs usually sacrifice market performance to deliver a greater dividend return, and this implies a significant opportunity risk sometimes.

Verdict

All in all, I believe that PFM is a good vehicle if you want to invest for the long term and develop an attractive yield on cost over time. However, there are other funds out there that have performed better, are cheaper, and manage more money; so it's a good idea to do some further research before you reach a decision.

What is your view? Do you own PFM or intend to? Do you favor some other ETF for the same job? Feel free to leave a comment below! Thank you for reading.

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