The Invesco Dividend Achievers ETF Badly Needs A Makeover

Summary

• The Broad Dividend Achievers are an impressive group of companies on paper, but the Index has become bloated with underperformers in recent years.
• Requiring ten years of consecutive dividend growth is outdated; such an arbitrary number should not be used to predict future performance, especially if no financial health screens are used.
• Compared with the S&P 500, PFM currently has less exposure to Tech and Communication Services and more exposure to Consumer Staples and Industrials.
• The fund's high expense ratio of 0.53% is the final nail in the coffin for this dividend ETF given how there are many other low-cost options available.

Photo by porcorex/iStock via Getty Images

Investment Thesis

The Invesco Dividend Achievers ETF (NASDAQ:PFM) is losing its cachet. Ten years of dividend growth isn't as impressive as it was five years ago, considering its constituents spent much of the last decade easily growing dividends in the longest bull market on record. This year, PFM ballooned from 284 to 350 constituents and now represents a high-fee market-like fund full of underperformers that pay less in dividends than the S&P 500. While I slightly favor PFM's sector allocations compared to the broader market, there are much better and cheaper options available. Therefore, I advise investors to pass on PFM and look for others who have at least some additional financial health screens.

ETF Profile

PFM tracks the NASDAQ US Broad Dividend Achievers Index, which is comprised of companies with at least ten consecutive years of increasing annual regular dividend payments. Constituents are evaluated annually in March using market data through the end of December. It's a market-cap-weighted Index with a maximum weight of 4% for any single security. PFM's expense ratio is 0.53% and currently has about $637 million in assets under management.

With 350 securities, the Index is well-diversified at both the sector and industry level. In addition to the sector breakdown below, PFM holds companies across 95 different industries.

Source: Invesco Dividend Achievers ETF Overview

Information Technology comprises 16.29%, which is different than how other dividend ETFs are constructed because it's a market-cap-weighted fund. Microsoft (MSFT) and Visa (V) are in the top ten holdings as shown below, while others like Oracle (ORCL) and Accenture (ACN) round out the top 20. Financials, Health Care, Consumer Staples, and Industrials each make up about 14%.

Source: Invesco Dividend Achievers ETF Overview

Compared with an Index fund like the iShares Core S&P 500 ETF (IVV), PFM has less exposure to Information Technology and Communication Services and more Industrials and Consumer Staples. Generally speaking, I favor these differences, as I expect a rotation out of tech stocks this year.

Source: Created By Author Using Data From Invesco And iShares

As expected with a dividend growth fund, PFM's dividend history is favorable, though not without a few blips along the way. Dividends have grown at an annualized rate of 5.10% since 2006.

Source: Seeking Alpha

U.S. Broad Dividend Achievers Performance

Since October 2005, PFM has underperformed the S&P 500 by 2.10% per year. Most of the underperformance appears to have begun in 2014, about five years after the Great Financial Crisis ended, paving the way for the longest bull market run in history.

Source: Portfolio Visualizer

Another way of viewing the data is by three-year rolling returns, as shown below. As of April 2021, PFM has underperformed by 3.74%. In fact, PFM's three-year rolling returns have not outpaced IVV's since 2013.

Source: Portfolio Visualizer

Investors haven't received any additional dividends either. Assuming you decided not to reinvest dividends to fund their living expenses instead, IVV would have generated more income the majority of the time.

Source: Portfolio Visualizer

I attribute this lackluster performance to the fact that the U.S. Broad Dividend Achievers just aren't as impressive as they once were. It's now a bloated Index with 350 constituents. I used the Wayback Machine to find that in 2014, there were only 239 constituents. It grew steadily up until the beginning of 2021, when it had 284 constituents. Now, as a result of March's reconstitution, it's exploded by nearly 25%.

Selected Fundamental Metrics

As with any ETF review I do, I will focus more on how I believe an ETF will perform in the future rather than relying on past performance. Below are some selected fundamental metrics I've calculated, broken down by the top 20 industries, which comprise about 70% of the fund.

Source: Created By Author Using Data From Seeking Alpha

On the current fundamentals, I view PFM as one with slightly less risk than the market, per its 0.95 five-year beta, but also one that is priced about the same as the market based on its forward price-earnings ratio. The lower cash to total debt ratio doesn't raise a concern, as I consider anything about 50% to be strong, and the payout ratio is below 50%. However, Wall Street isn't so optimistic about this group of historical underperformers. On a weighted-average basis, the current constituents have returned 138.21% in the last five years (CAGR of 18.96%) compared to the S&P 500's 232.85% (CAGR of 27.19%). Analysts are only projecting one-year revenue growth of 5.26% for PFM's constituents compared to 9.46% for the S&P 500. They see weakness in top industries like Specialty Industrial Machinery, Regulated Electric Utilities, Diversified Banks, Integrated Oil & Gas, and Telecom Services.

Personally, I'm not as bearish on these industries as I think rising inflation rates will be beneficial (or at least less harmful) to the Consumer Staples and Utilities sectors. Costs are typically easier to pass on to consumers who need these products and services, making consumers have less money available to be spent elsewhere. Less exposure to the Information Technology sector is welcome. Still, I'm not quite sure it's worth paying a relatively high fee of 0.53% annually for a couple of minor changes you could get just by using sector ETFs instead.

Investment Recommendation And Conclusion

The bottom line is that ten years of consecutive dividend growth is not impressive anymore. It's been relatively easy for companies to grow their dividends in the longest bull market in history, and the short-lived stock market downturn caused by the pandemic was not enough to trim the fat off this bloated fund. I'd instead recommend looking at the U.S. First Trust Rising Dividend Achievers ETF (RDVY), which I wrote about earlier this month. Unlike PFM, these Achievers also require a track record of dividend growth, but it's not as stringent. In exchange, it screens for financial health metrics that focus on cash preservation, and since its inception, it's outperformed PFM by an annualized 3.78%.

My advice is to take a pass on PFM and instead look to get your portfolio's allocations by sector right. If you believe inflation is not transitory and want protection from higher interest rates, increase your allocations to REITs, commodities, and Consumer Staples and pare back exposure to Information Technology and Consumer Cyclical stocks. PFM does this to a certain extent but far from sufficient to justify its high fees. While it's likely to outperform the S&P 500 if tech stocks crash, investors can simply do much better.

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.