Invesco Dividend Achievers ETF: A Bloated Fund Not Worth Buying

Funding Thesis

The variety of corporations which have elevated dividends for at the very least ten consecutive years is rising, and with every passing yr, this once-admirable dividend development streak will get much less spectacular. The Invesco Dividend Achievers ETF (NASDAQ:PFM) tracks these 373 corporations, however because of its market-cap-weighting scheme, it finally ends up being too just like an S&P 500 Worth Index fund. For 0.53% in annual charges with no high quality screens, it is smart that PFM has been an average-at-best long-term performer. I count on it is going to stay that means sooner or later, and subsequently, I’m limiting my ranking on PFM to a maintain.

ETF Overview

Technique and Fund Fundamentals

PFM passively tracks the NASDAQ US Broad Dividend Achievers Index, choosing constituents with at the very least ten years of accelerating annual common dividend funds. Critiques are as soon as per yr in March, and the Index is market-cap-weighted with a cap of 4% per safety at every quarterly rebalancing. In consequence, PFM is extra concentrated than you may assume. I’ve listed some further statistics beneath for simple reference:

• Present Worth: $38.68
• Property Beneath Administration: $735 million
• Expense Ratio: 0.53%
• Launch Date: September 15, 2005
• Trailing Dividend Yield: 1.87%
• 5-Yr Dividend CAGR: 7.79%
• Ten-Yr Dividend CAGR: 6.08%
• Dividend Frequency: Quarterly
• 5-Yr Beta: 0.85
• Variety of Securities: 373
• Portfolio Turnover: 28% (6%, 5%, 13%, 20% From 2017-2020)
• Property in Prime Ten: 25.05%
• 30-Day Median Bid-Ask Unfold: 0.05%
• Tracked Index: NASDAQ US Broad Dividend Achievers Index
• Quick-Time period Capital Good points Tax Fee: 40%
• Lengthy-Time period Capital Good points Tax Fee: 20%
• Tax Type: 1099

One optimistic function is that PFM is a low-turnover ETF. It is smart, on condition that qualifying corporations are prone to preserve their dividend development standing. There is a good likelihood PFM can have most of the identical securities in 5 years because it does at this time, so passive traders will recognize not having to examine in annually because the Index reconstitutes. On the draw back, the Index is turning into so watered down that ten consecutive years of dividend will increase are now not spectacular. In my opinion, traders want further high quality or valuation screens.

Sector Exposures and Prime Ten Holdings

The desk beneath highlights sector publicity variations between PFM and three different funds: the SPDR S&P 500 ETF (SPY), the SPDR S&P 500 Worth ETF (SPYV), and the ProShares S&P 500 Dividend Aristocrats ETF (NOBL). NOBL requires 25 consecutive years of dividend will increase, so it is the following degree up for these valuing dividend consistency.

Based mostly on these publicity ranges, PFM could also be thought of a cross between SPY and SPYV, primarily due to its excessive publicity to Expertise and Shopper Staples shares. Notably, it lacks any significant publicity to Vitality and Supplies shares, which are sometimes commodity-driven. This function is a key cause for PFM’s latest underperformance towards different large-cap dividend ETFs. This may in all probability proceed, too. Shares in these sectors are much less prone to attain ten consecutive years of rising dividends as a result of commodity costs are cyclical.

PFM’s prime ten holdings, which whole one-quarter of the ETF, are proven beneath. Microsoft (MSFT) is certainly one of 26 Expertise shares within the Index, whereas three Well being Care shares make the listing. They’re UnitedHealth Group (UNH), Johnson & Johnson (JNJ), and Procter & Gamble (PG). In line with World Trade Classification Requirements, Visa (V) and Mastercard (MA) are additionally thought of Expertise shares.

Historic Efficiency

Traditionally, PFM seems nearer to an S&P 500 Worth fund greater than something. Its annualized returns are virtually equivalent, but it surely did expertise much less volatility. In consequence, its risk-adjusted returns (Sharpe and Sortino Ratios) had been barely higher. Nonetheless, PFM trailed SPY by 2.89% per yr, which, over 16.5 years, means an underperformance of 124%.

In equity, most of this underperformance got here within the final 5 years, and PFM was a strong product up till then. The graph beneath exhibits the abrupt change in five-year rolling returns round 2016.

ETF Evaluation

Dividend Progress and Yield Historical past

Since all constituents have grown dividends for an prolonged interval, I doubt dividend security and consistency are a problem. Nonetheless, the diploma of dividend development is usually an issue. PFM’s trailing yield is only one.87%, so I believe traders want some regular development over time to be a worthwhile long-term funding. The graph beneath exhibits that this development is meager – solely 5.19% annualized within the final 15 years.

The expansion in 2017-2018 virtually offsets one another, so the figures could also be troublesome to interpret. As a substitute, I’ve graphed the distributions on a trailing twelve-month foundation and included the yield on every ex-dividend date to present a greater image. You may see that distribution development is not linear however has elevated at an inexpensive price over the past ten years. From March 2012 to March 2022, trailing distributions rose from $0.3339 to $0.7216, or an annualized 8.01%. Yield has been extra unstable, after all, but it surely’s value noting that the yield hasn’t been this low since December 2017.

Dividend Scorecard

In search of Alpha’s Dividend Grade for PFM is an “A-,” however as talked about earlier than, dividend development is my principal concern as a result of I do not assume there’s a problem with security and consistency. To research this in additional element, I’ve calculated weighted-average scores for PFM’s prime 20 industries, which whole about two-thirds of the ETF. The web scores for your entire ETF are on the backside, alongside scores for NOBL, which might be an inexpensive various when you favor an extended dividend development streak.

Although PFM has 373 constituents, it has roughly the identical focus in its prime 20 industries as NOBL, which takes an equal-weight strategy. In my opinion, selecting PFM over NOBL for diversification functions would not make sense. Nonetheless, PFM seems to be a better option for dividend development and security, as mirrored by its “B+” grade in comparison with NOBL’s “B” grade.

Constituents even have the same gross dividend yield of two.09% however have stronger three- and five-year dividend development charges. This extra strong development is anchored by shares within the Knowledge Processing & Outsourced Providers, Methods Software program, Managed Well being Care, Semiconductors, and Well being Care Gear industries. Collectively, these account for 21.71% of PFM in comparison with 6.31% in NOBL.

One other optimistic function is PFM’s decrease dividend payout ratio (42.33% vs. 53.06%). I exploit 60% as a ballpark determine for what I contemplate protected (75% for Utilities), and solely 13.99% of PFM’s constituents by weight cross this threshold. That determine will increase to 23.42% for NOBL, so I believe PFM has extra room to develop their dividends, all issues being equal.

Basic Evaluation

For my basic evaluation, I’ll take a look at every ETF’s income and earnings development charges and their valuations. I’ve added SPYV to the combo because of its historic efficiency similarities.

The above desk suggests that each one three funds have comparable income and earnings development charges, although SPYV is cheaper than PFM based mostly on its ahead price-earnings ratio (21.08 vs. 21.70), trailing price-sales ratio (4.17 vs. 4.96), and trailing price-cash circulation ratio (18.03 vs. 19.69). These variations are minor, however they recommend there is not any cause to be paying 0.53% per yr in bills for what seems to be an inferior portfolio.

Towards NOBL, PFM does seem to have an edge. It has a bigger market capitalization, which often suggests higher profitability, and it has higher development charges and valuations (apart from price-sales). For those who worth dividend consistency, select PFM, however this is able to not be my strategy. Except an ETF has a lot better fundamentals, I default to the lowest-cost possibility. SPYV’s expense ratio is simply 0.04%, leading to simply 0.59% of your whole good points misplaced to charges over ten years (assuming a ten% annual return). In distinction, in response to Larry Bates’ calculator, you will lose 7.67% of your earnings to charges with PFM.

Funding Suggestion

PFM definitely appears higher than NOBL for these valuing dividend consistency. Nonetheless, I warning towards this strategy, contemplating how PFM’s historic returns are almost equivalent to SPYV. Its present portfolio is weaker on development and valuation, and the 1.87% dividend yield is near its lowest level ever and is unlikely a promoting level for dividend traders.

The variety of corporations which have elevated their funds for ten consecutive years is just too giant, and it is now not a metric that implies superior high quality. PFM is an average-at-best dividend ETF with excessive charges with none further high quality screens. I do not advocate it and assume you are higher off going with low-fee worth ETFs as a substitute.