PEY: Purely For Income

seekingalpha08-20

PEY offers a 4.81% TTM yield with monthly payouts and diversification across 50 stocks.Stock selection rules are based on yield and dividend increases.Its composition leads to poor total returns and ...

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J StudiosThe Invesco High Yield Equity Dividend Achievers™ ETF (NASDAQ:PEY) caught my attention with its attractive name. A yield of 4.81% (TTM) yield and monthly pay-outs are certainly a draw, as is its diversification across 50 stocks. If monthly distribution is your focus, then you could do a lot worse. However, if you consider a total return, PEY is a fund to avoid. Rigid rules in its selection process means it can't consistently deliver both. Constructing PEY's Portfolio PEY is a large fund with an AUM of $1.22B. It is passively managed and, according to the fund page, based on the \"NASDAQ US Dividend Achievers™ 50 Index (Index)\" which comprises 50 stocks selected principally based on dividend yield and consistent growth in dividends. So far, so good and the selection process as detailed in the prospectus is, in theory, a good one. Liquidity is ensured by a simple rule - the issuer of the security must have a minimum market capitalization of $1 billion...Stocks must have had a minimum three-month average daily dollar trading volume of $1 million. Quality is prioritized. Eligible securities for the Parent Index must have, among other things experienced an increase in annual regular dividend payments for at least the last ten consecutive calendar or fiscal years As the old saying goes, the safest dividend is the one that has just been raised. A high yield and sector diversification is ensured by the next step, - Nasdaq ranks the universe of securities according to their trailing 12-month dividend yield as of the last trading day in February. The 50 highest-yielding securities are included in the Underlying Index, as long as no sector has more than 12 securities. In the event there are more than 12 securities in a single sector, the top 12 securities by dividend yield are included. Stocks are weighted using a \"modified dividend yield weighted methodology that incorporates the trailing 12-month dividend yield of each security as compared to the dividend yield of all securities in the Underlying Index.\" They are reweighted every quarter. One important point details what happens when a company cuts or suspends its dividend. At each month-end, if a constituent suspends or decreases its dividend payment by 50% or more based on the ex-date of the last dividend, then the constituent will be removed from the Underlying Index after the close of trading on the third Friday of the following month. The 50% figure is a logical cut-off point, but this rule is one that can be gamed. When Walgreens Boots Alliance (WBA) slashed its dividend earlier this year, I doubt they came up with the 48% reduction by chance. It prevented funds like PEY from passively dumping stock, and WBA is still one of its top 10 holdings. Furthermore, there are no other ways to shed this stock quickly. The Index won't get rid of it until next March when it will be ineligible due to having no dividend raises. The Underlying Index is rebalanced annually after the close of trading on the third Friday in March using market data through the end of December. Indeed, the timing of the dividend cut may have also gamed this rule as if it were announced a month earlier in December, WBA would be dumped from the index in March 2024 rather than March 2025. This is one of the problems with passively managed funds - rules are rigid and can be manipulated. Holdings The selection process described above leads to the following top 10 holdings -   Top 10 (Invesco) There are some recognizable dividend staples in this list. Weighting is on the low side so the top 10 constitutes just 27.91% of the total portfolio. Sector exposure is reasonably balanced, but clearly, the 25% cap has to be applied to financials and utilities.   Sector Exposure (Seeking Alpha) In case you are wondering where REITs are, the prospectus states, \"Securities issued by REITs and limited partnerships are ineligible for inclusion in the Underlying Index.\" The Dividend The 4.81% TTM yield is the fund's main attraction and compares well to peers. A scan for similar funds with a dividend between 4% and 6% reveals few competitors. Indeed, when the monthly payout is considered, only DIVO makes the list.   Peers (ETFdb.com) The SEC 30-Day Yield of 4.33% is less impressive, but PEY's share price has rallied nearly 10% from the July lows, so this can be expected. Distributions are paid out of income rather than relying on the return of capital. When you see a high dividend, this is one of the first things to check.   Distributions (Invesco) Performance and Expenses This is the section where PEY gets unstuck. A 0.52% expense fee for a passive fund is too high. This is especially true when the fund is focused on income like PEY. After all, 0.52% would not make much difference in a volatile ETF with capital gains of 50%, but is a major cut from a 4.33% yield. Another turn-off is the fund's total returns. For starters, PEY consistently underperforms its Underlying Index.   Performance (Invesco) Other dividend-focused funds have much better total returns.   Peer Comparison (Seeking Alpha) Only SPHD from the chart above has a dividend over 4% like PEY, so the other funds may be less attractive for income investors. Still, it is disappointing to see PEY at the bottom of the heap and SPYD has outperformed by nearly 15% over the past year. Compared to the S&P 500 (SPY), PEY underperforms considerably. The returns are actually similar to TLT, and there is a clear correlation over the last year. Data by YChartsOver a longer holding period, however, PEY is a much better investment than TLT, with a much better CAGR, much smaller draw downs, and a better Sortino Ratio.   PEY v TLT (Portfolio Visualizer) While the total return may be disappointing when compared to the likes of the S&P 500 and other dividend ETFs, its high dividend yield sets it apart, and it compares favourably to bond ETFs like TLT. Conclusions Passively managed ETFs require set rules for portfolio composition and weighting. These sometimes select \"bad\" stocks and the rules can even be manipulated as seems the case with WBA. They also have to favour certain metrics over others, which is one reason why PEY has an attractive dividend yield but poor total returns.  In terms of high yield and monthly pay-out from income, PEY does not have many competitors and is an attractive fund. I rate the fund a \"hold\" if income is your main focus.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"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":"4.29.2","shortVersion":"4.29.2","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/2460064155"}