- This ETF is an index like investment of companies with a strong history of raising dividends.
- COVID-19 has resulted in a temporary price decline that presents a short-term buying opportunity.
- ETF is yield rich at 5.34%.
- Retracement of coronavirus losses provides 21.5% upside.
Much has been written about the Dividend Achievers. These are stocks that have raised their distributions for at least 10 consecutive years. Doing so requires a firm to maintain a strong balance sheet, good cash flow, and usually rising sales. These firms tend to be recession resistant with strong moats. For retirees, a steady stream of dividends that is very nearly guaranteed to grow in excess of the inflation rate ensures spending power does not erode. At the same time, rising distributions tend to lift stock prices as well providing a capital growth kicker.
Right now, I really like Invesco High Yield Equity Dividend Achievers ETF (NASDAQ:PEY) as an investment. Like most indexed funds in the market, it has declined with the general coronavirus triggered selloff in equities. I think the market has over-reacted as these are strong companies that are sure to weather the storm. Thus, there is a limited time opportunity to buy in at a discount. PEY is currently more than 21.5% below its 52 week high, set just before the outbreak volatility event in March. Simple retracement to its pre-coronavirus position would yield a substantial gain for these stalwart companies.
But there is more. The ETF currently yields a fat 5.34% annually. I'll discuss later what portion of that yield may be at risk for cut. These companies have taken great strides to join the prestigious Dividend Achievers club. Firms are typically very hesitant to lose their status and will often borrow from the markets just to eke out a 1 penny raise just to keep the streak going. Your yield at market will almost certainly fall as the fund is currently undervalued. But your dollar distributions are almost certain to rise.
PEY is based on the Nasdaq US Dividend Achievers 50 index. This index is composed of 50 stocks that have raised distributions every year for at least 10 years. The market cap must be at least $1 billion and REITs and MLPs are not eligible. Weighting is done by a proprietary method and is based on a modified yield weighting as of the last trading day in February (the evaluation is done annually in March). No sector can have more than 12 stocks and no sector can have more than 25% weighting. In addition, no single stock can compose more than 4% of the index. Rebalancing is done quarterly in March, June, September, and December. Invesco's ETF brings this index to market by investing 90% or more of its assets as per the index weightings.
I want to highlight the top 20 holdings (PEY holds 50 securities as per its underlying index). These top 20 holdings make up a little over half of the fund by weight.
Source: Author's research, Yahoo! Finance, Invesco website
You might note immediately that the lowest yield in that group (as of yesterday the 2nd of June) is 3.55%. As of this writing, the broad market yields 1.99% as indicated by SPY. This should not be surprising as it takes a decade of dedication to shareholder return to reach the Achievers status. Thus, these are mostly mature companies in the cash gushing phase that primarily have their return in yield rather than share appreciation.
One of the great things about ETFs, especially ones that track an index is the one-click portfolio diversification they provide at low cost. With PEY, you get 50 companies with an average market cap over 40 billion at an expense ratio of a mere 0.53%. These holdings are spread out across ten sectors.
Source: Author's research at Invesco.com
The fund took a big hit with COVID-19 that I think presents an excellent entry point. Most recent aggregate data available from Invesco is from 31MAR2020 but you can see among other great metrics, ROE was 12.29% at that time.
The fund is heavily invested in financial stocks. You will find that is the case for most high dividend funds. The current economic environment, especially zero interest rate policy from the Fed is going to suppress bank earnings. Banks are much better capitalized in this crisis than they were in 2008 but if interest rates do not rise for some time, distributions of those financial stocks might become unsustainable.
This is also heavily invested in energy stocks with XOM and CVX both being in the top 20 holdings. Those two companies are borrowing to sustain their distribution during the downturn. That weakens the balance sheet and is not sustainable. In a world that may have reached the peak for oil demand, these businesses could be in terminal decline. I suspect any distribution cuts will come from this sector first.
There could be a second wave. Many medical experts are alarmed at current policy to reopen the economy and expect a second spike in coronavirus infections. This could lead to repeat of the market crash in March. In March, PEY fell as low as an 11.78 closing price, indicating practical downside of as much as 22.5% as of this writing.
Action to Take
Buy Invesco High Yield Equity Dividend Achievers ETF up to $16.50 (pricing as of this writing is $15.20). Protect your downside with a 25% trailing stop. Do not adjust your stop for distributions received. Ordinarily, I recommend no more than 5% of your capital in any one holding but because of the broad diversification of this fund, I will recommend putting up to 10% of your investable capital in this idea.
This article was written by
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