2023-12-17 03:19:27 ET
Summary
- The Invesco High Yield Equity Dividend Achievers ETF is a 4-star rated fund that invests in the NASDAQ US Dividend Achievers 50 Index.
- The top holdings include Walgreens Boots Alliance, Nu Skin, and Altria, all of which have relatively high-yields but have experienced significant stock price declines this year.
- Today, I will review the PEY ETF to see if it is a worthy candidate for the "dividend income" category of your portfolio.
The Invesco High Yield Equity Dividend Achievers ETF ( PEY ) fund is rated 4-stars by Morningstar and invests at least 90% of its total assets in the NASDAQ US Dividend Achievers 50 Index. This index is comprised of 50 stocks selected primarily on the basis of dividend yield and dividend consistent dividend growth. The PEY ETF currently has a 30-day SEC yield of 4.78%. Today, I'll take a closer look at the PEY fund to see if it might deserve an allocation within the "dividend income" category of your portfolio.
Investment Thesis
As my followers know, I consider the "dividend income" bucket to be a critical component of a well-diversified portfolio built for the long term (see 5 Reasons Why Dividends Matter To Investors ). On the other hand, it has become obvious to me that many investors drastically over-emphasize dividend/yield to such an extent that they have a very rigid investment style in which dividend yield is practically their only investment criteria. Unfortunately, this is very common among retirees whose living standard and income (via pensions, social security, and other investment income) don't really require such an overly rigid investment approach in the first place. That led me to write my somewhat controversial Seeking Alpha article Retirees Beware: Dividend Investing Is Overrated .
Yet, my opinion is that dividend income equities deserve a well thought-out allocation within the portfolios of all investors. That being the case, today I'll look at the PEY ETF to see if it is a high-quality candidate for such a dividend income allocation for you.
Top-10 Holdings
The top-10 holdings in the PEY ETF are shown below and were taken directly from the Invesco PEY ETF webpage where investors can find more detailed information on the fund:
Invesco
The top-10 holdings equate to what I consider to be a moderately diversified 30.8% of the entire 50-company portfolio.
The #1 holding is Walgreens Boots Alliance ( WBA ) with a 4.2% weight. Walgreen's current 7.62% yield is primarily a result of the fact that the stock is down 36%+ over the past year (that despite a 25% gain so far in December). In my opinion, such a yield high is typically a sign of distress and, indeed, earlier this month Moody's cut WBA's credit rating to Ba2 - i.e. non investment junk status.
Nu Skin ( NUS ) is the #2 holding with a 3.6% weight. NUS currently yields 8% but has been flagged by Seeking Alpha's rating metrics as having " high risk of performing badly ". Indeed, SA's rating is spot-on and the stock has declined over 50% over the past 12-months. Nu Skin develops and distributes various beauty and wellness products for the global market.
The old Philip Morris tobacco company, Altria ( MO ), is the #5 holding with a 3.1% weight. MO currently yields 9.4% and is also down over the past year (11%). Earlier this month British American Tobacco ( BTI ) wrote down a whopping $31.5 billion from the value of its U.S. brands. MO stock dropped in sympathy. Meantime, note that the World Health Organization has called for a ban on flavored e-cigarettes .
The next five holdings in the PEY fund are all financial oriented companies: Lincoln National Corp. ( LNC ), Northwest Bancshares ( NWBI ), KeyCorp ( KEY ), Truist Financial ( TFC ), and Sandy Spring Bancorp ( SASR ). These stocks yield 6.5%, 6.4%, 5.7%, 5.7%, and 5.2%, respectively. SASR is another stock flagged by Seeking Alpha's rating metrics as having a high-risk for bad performance and the stock is down 21%+ over the past year.
Overall, the portfolio is most highly exposed to the Financials, Utilities, and Consumer Staples sectors:
As a result, that leaves the PEY fund considerably under-weight the important Energy, Health Care, and IT Sectors.
The Fund and the Index are reconstituted annually in March and re-balanced quarterly in March, June, September and December.
ETF Basics
The following is a summary of some important ETF metrics for the PEY fund that matter most to investors:
- Total Expense Fee: 0.52%
- Total Assets Under Mgt: $1.33 billion
- P/E = 10.6x
- Forward P/E = 10.5x
- Price-to-Book = 1.5x
- ROE = 10.5%
As you can see, with a total expense ratio of 0.52%, this is a very expensive ETF. As you can also see from the valuation metrics, the PEY ETF trades at more than a 50% discount to the S&P500 in terms of its P/E, forward P/E, and price-to-book metrics. In addition, its ROE is also significantly less than the S&P500's weighted average ROE of 18.6% (see slide two of this FDIC report ).
Performance
The chart below shows the long-term total returns of the PEY versus its tracking index as well as the Dow Jones U.S. Select Dividend Index:
Invesco
As you can see from the graphic, PEY's returns are quite pathetic and significant lag two of the primary dividend benchmarks in its category.
The graphic below shows the massive opportunity costs of owning the PEY ETF over the past 5-years versus a couple of much better performing funds in its category - like the Vanguard Dividend Appreciation ETF ( VIG ) and the Schwab U.S. Dividend Equity ETF ( SCHD ) - as well as compared to the broad market averages as represented by the ( VOO ), ( DIA ), and ( QQQ ) ETFs:
As you can clearly see, the PEY ETF lags them all by a significant margin.
Summary & Conclusion
With an expense fee of 0.52%, the PEY ETF is obviously a very expensive fund compared to the 0.06% fee that both the VIG and SCHD ETFs charge. Meantime, PEY significantly lags each of those two funds in terms of 5-year total returns.
The fund's top-10 holdings (and likely the rest of the portfolio ...) appear to be chock-full of dividend value traps : companies that suck in investors with a high dividend tease but whose stock prices tend to drop more on an annual basis than the dividends themselves yield because they operate in weak and generally declining businesses. That being the case, I am quite shocked that this fund has over $1 billion in AUM and it makes me wonder: who is investing in this ETF?
PEY is a STRONG SELL. Investors who unfortunately hold this fund should consider selling it right away and moving their assets into the SCHD ETF, or some choice energy companies - like ConocoPhillips ( COP ) and Chevron ( CVX ), for example - or simply increasing their allocation to the S&P500.
For further details see:
PEY: Another Perennial Underachieving Dividend/Yield Focused Fund