PEY: Is Wall Street Too Bearish On This 4.71% Yielding Dividend Achievers ETF?

seekingalpha04-26

PEY tracks the NASDAQ US Dividend Achievers 50 ETF Index, selecting high-dividend stocks from all size segments with at least ten consecutive years of dividend increases.The Index dividend yield is ...

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Still, it's one of the highest-yielding pure equity funds on the market.Negative Wall Street earnings revisions are one reason why PEY's holdings have such high yields. However, last quarter sales and earnings surprise results suggest these analysts are too bearish.Along with an ultra-low 13.98x forward earnings valuation, PEY could be a solid income play. These positive features should be weighed against the fund's persistent negative features, which include high fees, poor quality, and minimal growth potential.   uchar/E+ via Getty ImagesInvestment Thesis I last covered the Invesco High Yield Equity Dividend Achievers ETF (NASDAQ:PEY) on May 5, 2023, and recommended investors avoid its enticing dividend yield due to poor profitability metrics, weak earnings momentum, and high exposure to Utilities stocks. PEY has lagged behind most peers since, but its 4.97% trailing dividend yield makes it one of the more compelling income plays on the market. Today, I will evaluate whether chasing that yield is worth it by comparing it to other high-yielding alternatives like the SPDR S&P 500 High Dividend ETF (SPYD), the iShares Core High Dividend ETF (HDV), and the Schwab U.S. Dividend Equity ETF (SCHD). I hope you enjoy the analysis. PEY Overview Strategy Discussion PEY tracks the NASDAQ US Dividend Achievers 50 ETF, selecting 50 dividend-paying stocks from the NASDAQ US Broad Dividend Achievers Index. An initial requirement is ten consecutive years of dividend increases, which limits the selection universe to about 400 stocks (excluding REITs). Most of this universe includes stocks in the Consumer Staples, Financials, Industrials, and Utilities sectors, which explains PEY's current composition. These four sectors comprise about three-quarters of the portfolio.   InvescoAfter the initial screens for dividend growth consistency and liquidity, the Index selects the top 50 highest-yielding securities. The Index also weights the securities by yield and rebalances to these target weights each quarter, thereby ensuring ultra-high dividend payments. To illustrate the effect, current holdings have a 5.02% average dividend yield but a 5.23% weighted average dividend yield. After subtracting the fund's 0.52% expense ratio, shareholders net 4.71%. This dividend yield is excellent, but PEY's high fees are a tough pill to swallow, a strategy that substantially and directly impacts income investors. Performance Analysis PEY launched on December 9, 2004, but only introduced sector and security weight constraints in 2013. On its website, the ETF benchmarks against the Dow Jones US Select Dividend Index, which DVY tracks. The growth of $10,000 for both Indexes over the last ten years is below. InvescoFor the month ending March 2024, PEY's Index gained 167.00% compared to 148.05% for its benchmark. However, expenses had a significant impact on the returns for both. For this period, PEY gained 153.30% compared to 138.03% for DVY, with most of PEY's outperformance occurring in 2016. PEY beat DVY by 9.74% that year (31.39% vs. 21.65%), while DVY delivered superior returns afterward. Portfolio VisualizerAs detailed here, I place little emphasis on past performance. However, it's worth noting that PEY's annual returns are inconsistent. Consider these annual rankings compared to other value ETFs over the last decade.  2014: #3/69 (Quartile 1) 2015: #3/75 (Quartile 1) 2016: #7/87 (Quartile 1) 2017: #86/99 (Quartile 4) 2018: #41/112 (Quartile 2) 2019: #66/118 (Quartile 3) 2020: #100/125 (Quartile 4) 2021: #83/132 (Quartile 3) 2022: #8/142 (Quartile 4) 2023: #121/152 (Quartile 4)  These results illustrate the difficulty of predicting a winner based on past performance. Often, strong performance comes in waves, which PEY shareholders undoubtedly are counting on today after five consecutive years of below-average returns. PEY's strategy guarantees a consistently high dividend yield, but as for total returns, evaluating its fundamentals is necessary. Let's do that next, starting with PEY's current composition. PEY Analysis Sector Exposures and Top Holdings The following table highlights PEY's sector exposures and top three holdings in each, where applicable. These are cash-adjusted weights, so they differ slightly from the earlier sector exposures graph from Invesco. The Sunday InvestorAltria Group (MO) is PEY's largest holding at 3.79%, followed by Leggett & Platt (LEG) and First Interstate BancSystem (FIBK) at 3.09% and 2.75%, respectively. All of PEY's top ten holdings yield at least 5%, with Stanley Black & Decker (SWK) as the lowest-yielding stock at 3.57%. As mentioned, PEY can guarantee investors a high dividend yield because it's limited to 50 selections. Fundamentals By Sub-Industry The following table highlights selected fundamental metrics for PEY's top 25 sub-industries, which total 94.20% of the portfolio. I've also included summary metrics for SPYD, HDV, and SCHD in the bottom rows, allowing us to quickly see PEY's relative strengths and weaknesses. The Sunday InvestorHere are three observations to consider: 1. PEY has a 0.87 five-year beta, similar to its peers. Its gross dividend yield is 5.23%, but as mentioned earlier, its 0.52% expense ratio reduces the expected dividend yield to 4.71%. This figure is competitive with SPYD's 4.69% expected dividend yield and well ahead of the 3.72% and 3.91% figures offered by HDV and SCHD. Therefore, from a pure income perspective, SPYD is the best comparator. If you're also interested in total returns, it's worth examining HDV and SCHD. 2. PEY's main advantage is that it trades at just 13.98x forward earnings under the simple weighted average method, 5.44 points less than SPYD and higher than the 3.97-point discount at my last review. Given how the estimated earnings per share growth figures for the two funds are similar (-0.56% vs. -0.38%), it's an enormous advantage for PEY. Even HDV and SCHD don't offer much growth, so there is a case for going with the cheapest fund. Since SPYD selects only S&P 500 Index stocks, it has a profitability advantage, but is not significant. PEY's profit score, measured using individual Seeking Alpha Factor Grades, trails by 0.82 points on a ten-point scale (6.74 vs. 7.56). 3. The fundamentals for HDV and SCHD demonstrate that if you want quality, you'll need to pay for it and be willing to accept a lower dividend yield. For me, this trade-off is worth it. I'm confident higher-quality ETFs can better withstand recessions and bounce back quicker, and that's worth the 1-4 points extra in forward P/E and 1% less in dividend yield. In contrast, those more focused on current income must adopt a more contrarian investing style. PEY has a 4.55/10 EPS Revision Score, indicating that consensus Wall Street analysts have trended downward, likely triggering its selections' low share prices and higher dividend yields. Momentum Shift Required For PEY To Succeed Wall Street's negative view is at least partially warranted. PEY's constituents missed sales expectations by 3.02% last quarter and beat EPS expectations by 2.77%. In comparison, consider the weighted average surprises for other dividend-focused ETFs were as follows:  SPYD: -1.26% / 3.68% HDV: -1.57% / 3.91% SCHD: 0.33% / 2.09% DHS: -1.50% / 3.45% DGRO: -0.25% / 5.45% VIG: 0.70% / 5.10% DGRW: 1.28% / 4.96%  While weak sales and earnings surprises are typical for high-dividend funds, it's remarkable that PEY's results aren't much worse than those of DGRW, an ETF closer to large-cap blend than large-cap value. This has been the case for about one year now, though DGRW has outperformed PEY by about 15%. Portfolio VisualizerThis significant performance difference might not be warranted, and the gap between top- and bottom-performing dividend funds could close shortly. If that's the case, PEY should benefit, as its forward P/E is nearly nine points cheaper (13.98x vs. 22.84x) than DGRW's. Its P/E is also in the bottom 10% of all 170 value ETFs I track. Investment Recommendation  PEY has a 4.71% expected dividend yield and trades at only 13.98x forward earnings, significantly cheaper than high-dividend peers like SPYD. Given recent quarterly results, Wall Street analysts may be too bearish on its constituents, so it could be a solid value play. However, PEY has certain features I dislike that are likely to stay the same. They include a high 0.52% expense ratio, poor quality, and little growth potential. I'm more optimistic today than last year, but given these persistent weaknesses, I have limited my rating on PEY to a \"hold.\" Thank you for reading, and I look forward to your comments below.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2430255867"}