2023-07-21 07:30:25 ET
Summary
- Invesco High Yield Equity Dividend Achievers ETF is not a compelling investment due to the high risk of share price underperformance.
- PEY's portfolio contains many companies at risk of performing poorly in the current economic and monetary conditions.
- Alternative dividend-focused ETFs, such as the Fidelity High Dividend ETF and Amplify CWP Enhanced Dividend Income ETF, offer better risk-reward and have generated positive returns over the last year.
Despite offering a dividend yield of over 4%, the Invesco High Yield Equity Dividend Achievers ETF ( PEY ) does not appear to be a compelling investment given the current and impending market conditions. There is a high risk of share price underperformance in the coming quarters because a large portion of its portfolio holdings are expected to perform poorly. Furthermore, its expense ratio is significantly high, which may hurt investor return. Therefore, it is wise to search for alternative opportunities rather than investing in struggling ETFs with a high expense ratio.
Dividend Investing and Market Fundamentals
Dividend Indices total Returns Vs S&P 500 (S&P Global)
Despite the fact that dividend investing has outperformed the broader market index in recent decades, the majority of dividend categories have lagged significantly behind the index in the last ten years. The underperformance has increased in the last five years, particularly in 2023. For instance, the total returns for the S&P 500 High Dividend Index were only 8% in the previous ten years and 5% in the last five years. So far in 2023, the index's total returns are still struggling to reach positive territory, compared to the S&P 500's 19% gain. The underperformance is blamed on its stake in small and mid-cap companies in sectors such as real estate, consumer discretionary, communications, and finance. Other categories, such as dividend growers, have also lagged behind the broader stock market index, but their performance has been better than the high-yield category. This is due to their exposure to large and mid-cap stocks in the technology, healthcare, financial, and energy sectors. Year to date, the S&P U.S. Dividend Growers Index has returned 9%.
In addition to lagging performance, future market fundamentals do not favor dividend investing if you want to outperform the market. The US stock market has now officially entered a bull market, with the S&P 500 up 25% from last year's bear market lows. Analysts on Wall Street have set the S&P 500's median price target at 4800, up from the current level of 4500. Historical data show that once the market emerges from a bear market, it forms a long-term bullish trend capable of generating more than 300% growth. Market fundamentals suggest that the worst is over and that markets will likely stabilize further in the second half. For instance, earnings are also expected to rise, with fourth-quarter earnings expected to grow by a high single-digit to a double-digit percentage, according to FactSet data . With potential rate cuts in 2024, earnings growth in the mid-single digits, and better economic conditions than in 2023, it is also very likely that a bullish trend will continue. Overall, it seems that buying defensive dividend-focused ETFs does not help investors achieve market-beating returns when there is a high chance that a bullish trend will continue.
PEY Lags Potential to Generate Market-Beating Returns
The portfolio of the Invesco High Yield Equity Dividend Achievers ETF includes 50 of the top high-yielding stocks from the NASDAQ US Dividend Achievers Index, which only includes companies that have increased their dividends for the past ten years in a row. Despite its focus on the top 50 high-yielding dividend-paying companies with a track record of healthy business and dividend growth, PEY has underperformed the S&P 500 index over the last decade. The only time the ETF outperformed the index was during the 2022 bear market. Its underperformance increased in the bull market of 2023 with a negative 3% return compared to the S&P 500's total return of around 20%.
PEY Vs S&P 500 Total Returns (Seeking Alpha)
Aside from its subpar performance so far in 2023, the PEY does not seem to have the potential to produce market-beating returns in the second half and beyond. This is not simply due to bullish market conditions, where large- and mega-cap growth stocks dominate the market and drive S&P 500 prices higher; the potential underperformance is primarily blamed on its stock portfolio. PEY's portfolio contains a large number of companies from various sectors that are at risk of underperforming in the current economic and monetary conditions.
PEY Top 10 Stocks (Seeking Alpha)
The financial sector accounts for 26% of PEY's portfolio, with the majority of these stocks belonging to the mid and small-cap categories of struggling regional banks, insurance, and financial services companies. In recent years, these companies performed well in easy monetary and high economic growth environments. However, the Fed's rate hike policy and slowing economic growth have put significant strain on their business models and liquidity positions. For example, Lincoln National Corporation ( LNC ), its largest financial sector stockholding with a weightage of 3.34%, has lost nearly 11% of its share price value so far in 2023, bringing its twelve-month losses to 44%. Its share price decline is attributed to its deteriorating financial position. Last year, the company posted an annual adjusted loss of $5.33 per share. In the first quarter of 2023, it generated a net loss of $5.37 per diluted share, compared to a net income of $8.39 per diluted share in the year-ago period. During the earnings call , the CEO stated that they are rebuilding capital and expect earnings power to re-emerge more materially in 2024 and beyond. Therefore, challenges related to its earnings power are likely to keep its share price and dividend growth potential under pressure in the near term.
KeyCorp ( KEY ), a regional bank and one of PEY's largest stockholdings, fell short of revenue and earnings expectations for the second quarter of 2023. Furthermore, both metrics decreased by a double-digit percentage year over year. Deposits, interest income, and non-interest income fell year on year, while credit losses increased by nearly $100 million over the same period last year. Wall Street expects KeyCorp's earnings to fall 38% and 9% year over year in the third and fourth quarters, respectively. Deteriorating financial positions could put KeyCorp shares and dividend growth potential under pressure. Year to date in 2023, its shares are down around 34%. Like KeyCorp, there are several other struggling regional banks in its top 10 stockholdings and the rest of the portfolio. Truist Financial Corporation ( TFC ) and U.S. Bancorp ( USB ) are among its regional bank stockholdings that have provided disappointing outlooks for the rest of 2023.
Kennedy-Wilson Holdings Inc ( KW ), its only stockholding from the real estate sector, is also at risk of performing poorly, according to Seeking Alpha's quantitative analysis . The company reported a large loss in the first quarter, and Wall Street forecasts a staggering drop in earnings in the following quarters. Furthermore, PEY's consumer discretionary stockholdings, which account for more than 10% of the entire portfolio weightage, have performed poorly. For example, V.F. Corporation ( VFC ), which is also the second-largest stockholding of PEY's portfolio with a weight of 4.15%, has lost more than half of its share price value in the last year. SA's quantitative analysis also places it among the companies that are most likely to perform poorly . Whirlpool Corporation ( WHR ), PEY's second-largest stockholding in the consumer discretionary sector, issued a bleak outlook for 2023. Whirlpool anticipates full-year GAAP earnings per diluted share of $13.00 to $15.00, a significant decrease from previous estimates of $16.00 to $18.00.
PEY's holdings in the communication sector have also underperformed. For instance, shares of Telephone and Data Systems ( TDS ), its largest portfolio stockholding, has lost nearly half of its value in the last twelve months due to declining earnings potential. The company posted a loss in the first quarter and Wall Street estimates a big loss for the full year and years ahead. On the positive side, its holdings in the utility sector have performed well. The utility sector is likely to post low single-digit revenue and mid-single-digit percentage earnings growth in 2023, according to FactSet data.
Quant Rating and Alternative Opportunities
Quant Rating (Seeking Alpha)
PEY received a sell rating with a quant score of 2.48. PEY's low momentum score indicates that price volatility is likely in the near future. Momentum is a technical indicator that measures the strength of price movement in either direction. Furthermore, the low expense ratio score makes PEY less appealing. The expense ratio of the ETF is about 0.52%, which is higher than the median expense ratio for all ETFs of 0.49%. The expense ratio of many other dividend-focused ETFs is significantly lower than PEY. The expense ratio is one the most crucial factor to take into account because it calculates the cost of owning a stake in the fund.
In comparison to PEY, there are a number of other dividend-focused ETFs that provide better risk-reward ratios. Fidelity® High Dividend ETF ( FDVV ), for example, generated total returns of 15% over the last twelve months, slightly lower than the broader market index. High returns are attributed to its portfolio , which includes a large number of mega and large-cap stocks from the technology, healthcare, financial, and energy sectors. It has an expense ratio of 0.29%. Amplify CWP Enhanced Dividend Income ETF ( DIVO ) also generated positive total returns over the last year, owing to its portfolio concentration in large-cap stocks that are well-positioned to benefit from slowing economic conditions.
In Conclusion
In the current market conditions, the Invesco High Yield Equity Dividend Achievers ETF does not appear to be a solid option to own for investors seeking market-beating returns. Its fundamentals are weak because a large portion of its portfolio holdings, particularly in the financial sector, are expected to perform poorly in the coming quarters. It is also less appealing due to its high expense ratio, low momentum score, and high-risk factor. Investors with a low-risk tolerance who only want to invest in dividend-paying securities should look into other options that offer higher returns even in bullish market conditions.
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PEY Lags Market-Beating Returns Potential