PEY: Good Yield, And Cheap Valuations, But VYM Appears To More Reliable

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The Invesco High Yield Equity Dividend Achievers ETF with a two-decade old history, serves as one of the more established dividend yielding products.PEY does have a couple of things going for it, such...

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Investors may also apprec","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"PEY":"Invesco High Yield Equity Dividend Achievers ETF"},"translate_title":"PEY：收益率好，估值便宜，但VYM似乎更可靠","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"PEY":0.9},"content_text":"The Invesco High Yield Equity Dividend Achievers ETF with a two-decade old history, serves as one of the more established dividend yielding products.PEY does have a couple of things going for it, such as a compelling yield and cheap valuations, but the more popular VYM still has the edge.PEY's sector and market-cap exposure is not ideal, and the risk-reward on the charts does not look promising now.   JLFCapture Introduction Investors looking for dividend-themed ETFs from the equity universe have a plethora of options to choose from; one of the more long-standing products within this arena is the Invesco High Yield Equity Dividend Achievers ETF (NASDAQ:PEY), which will complete 20 years on the bourses by next month. As an income play, PEY certainly has its merits, with monthly payouts equating to close to 4.5% at current prices, but as a source of alpha generation, questions could certainly be asked. To elaborate, since PEY made its debut in 2004, it has grossly underperformed the equity benchmark, with the latter notching returns that are 2.5x greater than the former.   YChartsPEY tracks the Nasdaq US Dividend Achievers 50 Index, which essentially consists of the 50 highest-yielding stocks of The Nasdaq US Broad Dividend Achievers Index. If you followed our work last week, you’d note that we had written a piece on the ETF that tracks the Nasdaq US Broad Dividend Achievers Index (The Invesco Dividend Achievers ETF or PFM), and we were not very enthused about the plain vanilla manner in which stocks are picked, and also the time period screener which is utilized (growth over 10 years). When it comes to PEY per se, the priority here is “yield”, but it does also help that they aren’t just randomly picking out the highest yielding securities within a certain universe, but also supplementing that with a gauge that measures dividend growth year in and year out, over 10 years. This way, investors don’t run the risk of getting stuck with a bunch of stocks that are throwing up high yields only because of pronounced share price depreciation. PEY vs. VYM One of the more widely promoted dividend yield ETFs in the market is the Vanguard High Dividend Yield ETF (VYM), and to better understand PEY’s competitive positioning, we thought we would see how it stacks up against this biggie. Note that even though VYM made its debut on the market roughly two years after PEY, it has still managed to accumulate far greater AUM and witness a higher degree of dollar volumes (on a daily basis). To expand on this, note that with only $1.25bn in AUM, PEY’s figure equates to less than 2% of VYM’s ETF, while the differential on the average daily dollar volume front is around 25x! Clearly there’s little doubt about the relative popularity of the two products, but is it justifiable? Well as far as cost efficiency goes, there is no contest here, as VYM can be picked up at an expense ratio of just 0.06%, which is just around a tenth of PEY’s expense ratio. Investors may also appreciate the relative stability that VYM’s portfolio offers. On an annual basis, it only churns out 6% of its total holdings of 539 stocks. PEY on the other hand, is more of a focused play of 50-odd stocks, with an overwhelming chunk getting turned over every year (annual churn of 74%). Where PEY can hold its head high is the income facet. It distributes dividends on a monthly basis (giving investors the option to reinvest in other high-yielding avenues if the need arises) as opposed to quarterly payouts for VYM. Note that both products have been growing their dividends at a similar pace of 7% over the past three years, yet PEY’s current yield is substantially higher at almost 4.5%, and is also better than what it has typically yielded over the past four years (on average). VYM on the other hand only offers a yield of 2.77% which also currently lags its historical average which is closer to 3%. PEY’s fans will also appreciate the more attractive valuation/earnings trade-off that it currently offers, relative to VYM. Yes, PEY’s holdings are only poised to deliver mid-single-digit earnings growth, but it’s not as though VYM’s holdings will significantly trump that (the differential is only 2%). Yet when it comes to the respective P/E differentials, we’re looking at a 25% discount in favor of PEY at its multiple of just 11.28x.   Seeking Alpha, MorningstarDespite these favorable valuations, we suspect a lot of investors may not be keen to dive into PEY given its historical track record of volatility and risk-adjusted returns.   YChartsNote that since VYM got listed in 2006, it has consistently outperformed PEY, with the differential currently working out to 1.8x. Investors should also note that VYM tilts more towards large-caps (70% of the portfolio) whose income-generating characteristics are likely to be more consistent, and further augmented by more robust balance sheets and diversified business models. On the other hand, PEY tilts very much the other way with small-caps accounting for almost half the portfolio. This is a cohort prone to high volatility, and we see this get reflected in the relative volatility profiles of the two products.   YChartsAlso note that VYM appears to have done a far better job of attempting to generate excess returns for the total risk it takes, regardless of the time frame. This is captured by the superior Sharpe ratios, be it over a 3-year basis or a 15-year basis.   YChartsWhen you pursue high yielders, you're invariably going to face a lot of downside deviation, but note that VYM does a better job in managing that downside deviation and generating excess returns. This is reiterated by superior Sortino ratios both over the short term as well as the long-run.   YChartsClosing Thoughts As noted in the previous section, PEY does have some favorable sub-plots such as a solid enough yield, and cheap valuations, but the latter could also be a function of poor quality and a weak outlook for its holdings. We’ve seen historically how PEY doesn’t do a great job at managing risk, and its expense ratio can be off-putting as well. We highlighted the strong small-cap exposure, and besides that, almost half of PEY's portfolio is dominated by the rate-sensitive sectors of Utilities and Financials. The Fed continues to dilly-dally with further rate cuts and under the Trump administration one is likely to see policies that will stoke inflation, and diminish the Fed’s appetite to press on with cuts. A large part of PEY’s financial portfolio consists of regional banks that will continue to deal with diminished credit appetite, more stringent credit standards, and a rise in credit costs. Utilities tend to take up large chunks of debt on their balance sheets, and now they are even vulnerable to the risk of seeing IRA being rescinded.  Finally, also take note of PEY’s weekly price developments over the past year and a half. If we connect the peaks and troughs of the price movements, what we appear to have is a rising wedge pattern, marked by two converging ascending lines. For those not familiar with it, rising wedges remain vulnerable to weakness at higher levels. Even if we don’t necessarily see that and if you want to play the boundaries of the wedge, one can’t be jumping up in joy at the risk-reward on offer, given how far away the price is from the lower boundary.   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