PEY: A Better Place To Stash Cash - Smartly

| About: PowerShares High (PEY)

Summary

The Federal Reserve expects rates to remain low for some time to come.

Traditional cash deposits reflect this long lasting, low yielding environment.

Since low rates underpin equity markets, a high dividend yield ETF may be a better place to deposit cash.

The most recent observations and subsequent decision on key lending rates by the Federal Reserve's Federal Open Market Committee raised the eyebrows of many analysts. Just a few weeks ago, it was widely expected that the FOMC would consider it prudent to raise the benchmark federal funds rate four times in 2016. However, in what might be described as "a complete 180", the FOMC decided that US economic data and the global economy was not gaining enough momentum to increase the base rate.

In the press release, the FOMC noted that the employment situation had improved, but exports, domestic business investments, and any significant increase in inflation were all lacking. The key sentence noted:

[T]he federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run...

On one hand, having the benchmark fed funds target rate only one step up from the bottom at 0.25% to 0.50% means that lending rates will remain low at the consumer level. For example, according to Freddie Mac the current average rate for a traditional 30-year fixed rate mortgage is 3.54%, the lowest in three years. This is the purpose of keeping the benchmark rate low. It makes those big ticket purchases much more affordable, like homes, autos, home improvements, big appliances and so on. This in turn creates demand and stimulates more hiring and thus more consumer spending.

On the other hand, savings, checking accounts and CDs are hardly returning any yield. According to the most recent data from the Federal Deposit Insurance Corporation (FDIC), an average 60-month CD is yielding 0.79%! Short-term US Treasury yields are hardly yielding much better.

Dividend yielding equities may outperform but the investor runs the risks which are heir to stock markets. Fortunately, there are passively managed dividend focused ETFs which will do the stock selecting for you and return much better yields than available by traditional means; i.e., savings and CDs.

At this point, it's important to reflect back on that key phrase in the Fed statement, in particular, that the fed funds rate is likely to remain low 'for some time'. So the investor may choose to take the consumer side of the market and borrow, or to include a high yielding ETF in your portfolio until the Fed begins to see data consistent with a need to increase in the benchmark rate.

Among the top performers in this asset class is PowerShares High Yield Equity Dividend Achievers Portfolio ETF (NASDAQ:PEY).

Performance

Year to Date

1 Year

3 Year

5 Year

10 Year

Since 12/9/2004 Inception

Share Price

14.45%

17.03%

16.33%

15.07%

4.65%

4.35%

NAV

14.39%

16.89%

16.32%

15.05%

4.60%

4.32%

Nasdaq US Dividend Achievers 50 Index

14.61%

17.55%

16.92%

15.67%

5.04%

4.79%

Data source: Invesco.

Year to date, the fund has returned nearly 14.5%; over a one-year period, over 17%, and over a three-year period, over 16%. If your intention is to earn yield, these are the key time periods to focus on. Since it is generally expected that the Fed will raise just once this year (and then that's a maybe), anything returning better than the above mentioned rates might be worth holding until the economy gains real, inflation generating momentum. The fund tracks the Nasdaq Dividend Achievers 50 Index (DAY) which represents companies committed to enhancing shareholder value through dividends. To qualify for inclusion, a company must have increased its dividend payment for the last 10 or more consecutive years and also be liquid.

Data from Invesco

As might be expected, the fund puts a heavy emphasis on Utilities, Energy, Financials and Consumer Staples. A lesser emphasis is placed on Industrials, Telecom, Materials and Consumer Discretionary companies. Also, the fund tends to stay within those 'value' companies in large, mid and small cap, thus mitigating risk.

Data from Invesco

Utilities account for about 22.5% of the fund and include mostly the top yielding and most stable utilities. It's important to note that utilities usually have what appears to be terrible cash flow. This is not a true indication of the financial health of the company and likely results from the way utilities operate. In short, there are a lot of up-front costs. The fund includes Duke Energy (NYSE: DUK) with a yield of 4.13%; Southern Company (NYSE: SO) with a yield of 4.66%; and Consolidated Edison (NYSE: ED) with a yield of 3.47%.

Utilities 22.44%

Weight

Market Cap

Yield

TTM Dividend

Levered Free

Cash Flow

Dividend/

LFCF

EPS

Institutions Holding

CenterPoint Energy

(NYSE: CNP)

2.71%

$9.960

4.460%

$1.03

-$1.98

-52.020%

-$1.56

75.90%

MDU Resources

(NYSE: MDU)

2.07%

$4.550

3.240%

$0.75

-$0.76

-98.684%

-$1.50

63.70%

PPL Corp

(NYSE: PPL)

1.96%

$26.620

3.870%

$1.52

-$0.80

-190.000%

$0.76

48.00%

Duke Energy

1.96%

$55.970

4.130%

$3.30

$1.88

175.532%

$3.83

56.10%

Southern Co

1.94%

$47.970

4.660%

$2.24

-$3.58

-62.570%

$2.56

51.70%

South Jersey Industries

(NYSE: SJI)

1.92%

$2.400

3.510%

$1.06

-$0.60

-176.667%

$1.71

61.60%

Northwest Natural Gas

(NYSE: NWN)

1.81%

$1.630

3.150%

$1.87

$2.36

79.237%

$2.26

61.40%

National Fuel Gas

(NYSE: NFG)

1.71%

$4.710

2.890%

$1.62

-$4.35

-37.241%

-$9.66

70.30%

Con Edison

1.68%

$23.430

3.470%

$2.68

-$4.26

-62.911%

$3.84

54.50%

Avista Corp.

(NYSE: AVA)

1.61%

$2.690

3.230%

$1.37

-$1.40

-97.857%

$2.12

66.20%

Vectren Corp.

(NYSE: VVC)

1.58%

$4.270

3.100%

$1.60

-$0.36

-444.444%

$2.28

64.30%

SCANA Corp.

(NYSE: SCG)

1.51%

$10.210

3.210%

$2.30

$0.58

396.552%

$3.65

59.20%

Averages

$16.201

3.577%

$1.78

-$1.11

-47.589%

$0.86

61.08%

Data from Yahoo! Finance

The average yield for the utilities holdings is 3.58% with an average market cap of over $16 billion.

Energy 20.67%

Weight

Market Cap

Yield

TTM Dividend

Levered Free

Cash Flow

Dividend/

LFCF

EPS

Institutions Holding

ONEOK

(NYSE: OKE)

6.38%

$9.540

5.440%

$2.46

-$0.75

-328.000%

$1.27

75.30%

Murphy Oil

(NYSE: MUR)

5.63%

$5.220

5.100%

$1.40

-$0.02

-$14.20

84.40%

Helmerich & Payne

(NYSE: HP)

2.57%

$7.070

4.740%

$2.75

$4.69

58.635%

$0.94

99.50%

Chevron Corp.

(NYSE: CVX)

2.53%

$194.170

4.200%

$4.28

-$5.03

-85.089%

$0.69

62.60%

Occidental Petroleum

(NYSE: OXY)

1.91%

$57.550

3.980%

$3.00

$6.26

47.923%

-$9.86

81.60%

Exxon Mobil Corp.

(NYSE: XOM)

1.65%

$376.00

3.330%

$3.00

-$0.17

$3.11

50.10%

Averages

$46.220

4.465%

$2.82

$0.83

-76.633%

-$3.01

75.58%

Data from Yahoo! Finance

Energy accounts for 20.67% of the fund, and although the energy sector has fallen on 'hard times' to say the least, the financial strength, cash on hand and financial leverage secures the dividend. The energy holdings are dominated by Chevron with a 4.2% yield and $195 billion market cap, Exxon Mobil with a 4.365% yield and $376 billion market cap; and Occidental Petroleum with a 4.2% yield and a $57.5 billion market cap.

The average energy holding has a $46 billion market cap and an average yield of 4.465%.

Financials 17.99%

Weight

Market Cap

Yield

TTM Dividend

Levered Free

Cash Flow

Dividend/

LFCF

EPS

Institutions Holding

Cullen/Frost Bankers

(NYSE: CFR)

2.43%

$3.970

3.310%

$2.16

$4.95

43.636%

$4.24

78.90%

People's United Financial

(NASDAQ: PBCT)

1.99%

$4.760

4.310%

$0.68

$1.05

64.762%

$0.87

82.90%

Mercury General

(NYSE: MCY)

1.92%

$2.920

4.680%

$2.48

$0.96

258.333%

$1.30

45.50%

Old Republic International

(NYSE: ORI)

1.80%

$4.910

3.930%

$0.75

$2.84

26.408%

$1.54

75.80%

Eaton Vance

(NYSE: EV)

1.76%

$3.890

3.000%

$1.06

$4.19

25.298%

$2.10

76.30%

BOK Financial

(NASDAQ: BOKF)

1.75%

$4.020

2.820%

$1.72

$4.90

35.102%

$3.78

36.90%

Invesco

(NASDAQ: IVZ)

1.74%

$11.800

3.940%

$1.12

-$6.98

-16.046%

$2.04

85.60%

United Bankshares

(NASDAQ: UBSI)

1.62%

$2.640

3.460%

$1.32

$2.62

50.382%

$1.98

56.70%

Westamerica Bancorp

(NASDAQ: WABC)

1.50%

$1.230

3.210%

$1.56

$18.48

8.442%

$2.29

85.70%

Community Bank

(NYSE: CBU)

1.48%

$1.810

3.010%

$1.24

$3.14

39.490%

$2.20

70.50%

Averages

$4.195

3.567%

$1.41

$3.61

53.581%

$2.23

69.48%

Data from Yahoo! Finance

Financials account for nearly 18% of the fund, and again, the companies are best in class. These include investment manager Invesco with 3.94% yield and $11.8 billion market cap, international insurance company Old Republic with a 3.93% yield and nearly $5 billion market cap, and People's United Financial with a 4.31% yield and $4.7 billion market cap. It should be noted that although the word 'bank' is appended to its name, this is a well-diversified financial company offering banking, insurance and investment services.

The average financial holding yield is 3.567% and an average market cap of $4.2 billion.

Consumer Staples 14.08%

Weight

Market Cap

Yield

TTM Dividend

Levered Free Cash Flow

Dividend/

LFCF

EPS

Institutions Holding

Vector Group Ltd

(NYSE: VGR)

2.56%

$2.740

7.220%

$1.60

$7.28

21.978%

$0.47

44.80%

Nu Skin Enterprises

(NYSE: NUS)

2.53%

$2.260

3.430%

$1.42

$3.50

40.571%

$1.72

78.90%

Archer Daniels Midland

(NYSE: ADM)

1.62%

$24.790

2.790%

$1.20

$4.03

29.777%

$2.61

77.00%

Universal Corp.

(NYSE: UVV)

1.58%

$1.260

3.820%

$2.12

$4.43

47.856%

$3.92

98.30%

Altria Group

(NYSE: MO)

1.53%

$129.380

3.470%

$2.26

$5.68

39.789%

$2.77

60.60%

Flowers Foods

(NYSE: FLO)

1.44%

$3.780

3.460%

$0.64

$1.22

52.459%

$0.88

67.30%

Kellogg

(NYSE: K)

1.43%

$26.950

2.560%

$2.00

$3.63

55.096%

$1.57

82.60%

Procter & Gamble

(NYSE: PG)

1.38%

$221.470

3.250%

$2.68

$3.23

82.972%

$3.17

30.50%

Averages

$51.579

3.750%

$1.74

$4.12

46.312%

$2.14

67.50%

Data from Yahoo! Finance

Although it accounts for only 14.08% of the fund, the Consumer Staple holdings is solid best in class with companies known for dividends such as Proctor & Gamble with a 3.25% yield and $221 billion market cap, Altria Group with 3.47% yield and $129 billion market cap, and the country's largest producer of baked products, Flowers Foods with a 3.46% yield and $3.78 billion market cap. Some of Flowers' brands include Nature's Own, Wonder, Homepride and Tastykake.

Consumer Staple holdings average a 3.75% yield and $51.5 market cap.

Industrials 7.03%

Weight

Market Cap

Yield

TTM Dividend

Levered Free Cash Flow

Dividend/

LFCF

EPS

Institutions Holding

Caterpillar

(NYSE: CAT)

2.02%

$44.390

4.010%

$3.08

$7.87

39.136%

$1.90

66.60%

Cummins

(NYSE: CMI)

1.82%

$19.670

3.330%

$3.90

$8.23

47.388%

$7.57

84.70%

Emerson Electric

(NYSE: EMR)

1.69%

$33.920

3.550%

$1.90

$3.56

53.371%

$2.92

72.90%

Norfolk Southern Corp

(NYSE: NSC)

1.50%

$24.610

2.810%

$2.36

$1.90

124.211%

$5.39

69.80%

Averages

$30.648

3.425%

$2.81

$5.39

66.026%

$4.45

73.50%

Data from Yahoo! Finance

Industrial tally 7.03% of the fund and include three heavyweight global leaders, like Caterpillar with a 4.01% yield and $44.390 billion market cap, and one railroad, Norfolk Southern 2.8% yield and $24 billion market cap. It's important to note that NCS is diversified with interests in commercial real estate, telecommunications and rail equipment leasing.

Again, the Industrials are all best in class, averaging a 3.425% yield and a solid average $30.6 billion market cap.

IT 6.93%

Weight

Market Cap

Yield

TTM Dividend

Levered Free Cash Flow

Dividend/

LFCF

EPS

Institutions Holding

Qualcomm

(NASDAQ: QCOM)

1.97%

$78.450

3.940%

$2.12

$5.02

42.231%

$3.17

82.10%

IBM

(NYSE: IBM)

1.87%

$146.270

3.650%

$5.60

$12.75

43.922%

$13.19

59.90%

Maxim Integrated Products

(NASDAQ: MXIM)

1.57%

$10.66

3.19%

$1.20

$2.14

55.97%

$0.81

92.80%

Microchip Technology

(NASDAQ: MCHP)

1.53%

$11.220

2.720%

$1.44

$2.75

52.364%

$1.49

98.80%

Averages

$61.650

3.375%

$2.59

$5.67

48.622%

$4.67

83.40%

Data from Yahoo! Finance

Information Technology is not known as a sector for yield. The fund maintains a 4.1% IT holding, allocated over four established tech companies, including IBM and Qualcomm with 3.65% and 3.94% yields, respectively, and $146 billion and $78 billion market caps, respectively.

Telecom Services 4.10%

Weight

Market Capitalization

Yield

TTM Dividend

Levered Free Cash Flow

Dividend/

LFCF

EPS

Institutions Holding

AT&T

(NYSE: T)

2.26%

$248.290

4.830%

$1.92

$3.22

59.627%

$2.36

63.20%

Verizon Communications

(NYSE: VZ)

1.84%

$214.480

4.290%

$2.26

$4.63

48.812%

$4.41

64.50%

Averages

$231.385

4.560%

$2.09

$3.93

54.220%

$3.39

63.85%

Data from Yahoo! Finance

Similarly, the telecom sector is not known for solid yielding companies but for a few exceptions and they are both here: AT&T and Verizon. The combined market caps of these two holdings approaches half a trillion dollars with respective yields of 4.83% and 4.29%.

Materials 3.82%

Weight

Market Capitalization

Yield

TTM Dividend

Levered Free Cash Flow

Dividend/

LFCF

EPS

Institutions Holding

Nucor Corp

(NYSE: NUE)

1.97%

$16.060

2.980%

$1.50

$6.00

25.000%

$1.12

74.60%

Compass Minerals

(NYSE: CMP)

1.85%

$2.670

3.530%

$2.78

$3.04

91.447%

$4.36

94.60%

Averages

$9.365

3.255%

$2.14

$4.52

58.224%

$2.74

84.60%

Data from Yahoo! Finance

Materials account for 3.82% of the fund with just two holdings. The larger is Nucor Corp. Globally, steel production is extremely competitive and supply is currently ample. Nucor produces steel from scrap and is the largest recycler on the continent. Its decentralized management model allows the company flexibility to operate as efficiently as possible with 200 facilities. To be a profitable steel manufacture in the US, let alone globally, is no small achievement. Nucor's yield is 2.980%.

Consumer Discretionary 2.96%

Weight

Market Capitalization

Yield

TTM Dividend

Levered Free Cash Flow

Dividend/

LFCF

EPS

Institutions Holding

Meredith Corp.

(NYSE: MDP)

2.04%

$2.280

3.860%

$1.98

$4.84

40.909%

$3.68

98.10%

Gap

(NYSE: GPS)

0.92%

$7.560

4.860%

$1.99

$2.64

75.379%

$1.99

60.20%

Averages

$4.920

4.360%

$1.99

$3.74

58.144%

$2.84

79.15%

Data from Yahoo! Finance

The international clothing retailer Gap has 'youth on its side'. Gap markets under the popular Old Navy, Banana Republic and Athleta brand names. Don't let the trendy fashion motif fool you! This is a retail giant with over 3,700 retail outlets globally and over 130,000 employees. Keep in mind that the company has a large presence in Europe and does well in spite of a lagging economy on that continent. Gap's yield is 4.8% and its market cap is $7.56 billion.

Summary

Market Cap

Yield

TTM Dividend

Levered Free

Cash Flow

Dividend/

LFCF

EPS

Institutions Holding

Averages

$35.74

3.74%

$2.01

$2.59

17.260%

$1.72

70.08%

Data from Yahoo! Finance

The entire fund's average market cap is $35.74 and average company yield is 3.74%. One important ratio is the dividend to levered cash flow. Levered cash flow, by definition, is the remaining cash flow after all debt obligations are satisfied. The fund's average dividend represents 17.26% of the average levered cash flow. This is a good indication of dividend sustainability.

The NAV is $919 billion with 60.65 million shares outstanding. The total expense ratio is a bit high at 0.50%. The trailing twelve-month yield of 3.44% and the 30 SEC yield (after expenses) is a respectable 3.42%. Most importantly is the market liquidity of the fund. Its three-month average daily volume is 357,452. This is of the utmost importance for those investors seeking a yield above and beyond what's available if you're willing to lock up your cash for a year or two. The returns are even more attractive if the fund is to be held in a retirement account and distributions reinvested.

Referring again to the Fed, if they expect yields to be low for the foreseeable future it might be a good idea to look for well-constructed funds, like Invesco's PEY, which holds best in class, proven, established, well capitalized companies which can ride out a few years of slower growth. One caveat: don't just pile in. The UK secession unwind may cause a lot of market volatility. Further, the UK referendum has knock China's readjustment story out of the headlines and that might be just as complicated. If you have cash on the sidelines, dollar-cost average in, buy extra on the dips, and reinvest any distributions.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: CFDs, spread-betting and FX can result in losses exceeding your initial deposit. They are not suitable for everyone, so please ensure you understand the risks. Seek independent financial advice if necessary. Nothing in this article should be considered a personal recommendation. It does not account for your personal circumstances or appetite for risk.

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