Home Deep Analysis Invesco Dividend Achievers ETF: A Bloated Fund Not Worth Buying

Invesco Dividend Achievers ETF: A Bloated Fund Not Worth Buying

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investment thesis

The number of companies that have increased their dividends for at least a decade in a row is growing, and this once-admirable dividend growth momentum has become less impressive over time. Invesco Dividend Achievers ETF (NASDAQ: PFM) tracks these 373 companies, but it ends up being too similar to the S&P 500 Value Index Fund because of its market capitalization weighting scheme. For an annual fee of 0.53%, without a high-quality screen, it makes sense that PFM has been the best long-term performer on average. I expect it to stay that way in the future, so I limit my rating on PFM to Hold.

ETF overview

Strategy and Fund Fundamentals

PFM passively tracks the Nasdaq U.S. Broad Dividend Achievers Index, selecting constituents whose annual regular dividend payments have increased for at least ten years. Reviewed annually in March, the index is weighted by market capitalization and capped at 4% per security when rebalanced quarterly. So PFM is more focused than you might think. I’ve listed some additional stats below for easy reference:

Current Price: $38.68 Assets Under Management: $735 million Expense Ratio: 0.53% Release Date: September 15, 2005 Tracking Dividend Yield: 1.87% Five-Year Dividend CAGR: 7.79% Ten-Year Dividend CAGR​​​ Growth Rate: 6.08% Dividend Frequency: Quarterly Five Beta Years: 0.85 Number of Securities: 373 Portfolio Turnover: 28% (6%, 5%, 13%, 20% in 2017-2020) Top 10 Assets: 25.05% 30-day median bid-ask spread: 0.05% Tracking index: NASDAQ US Broad Dividend Achiever Index Short-term capital gains tax rate: 40% Long-term capital gains tax rate: 20% Tax form: 1099

A positive feature is that PFM is a low turnover ETF. This makes sense, since eligible companies are likely to keep their dividend growth going. There is a good chance that PFM will have many of the same securities as it does today in five years, so passive investors will appreciate not having to check annually when the index is restructured. On the downside, the index has become so diluted that a decade of straight dividend growth is no longer impressive. In my opinion, investors need additional quality or valuation screening.

Sector exposure and top ten holdings

The following table highlights industry risk differences between PFM and three other funds: SPDR S&P 500 ETF (SPY), SPDR S&P 500 Value ETF (SPYV), and ProShares S&P 500 Dividend Aristocrats ETF (NOBL). NOBL calls for a 25-year streak of dividend increases, so this is a higher level for those who value dividend consistency.

PFM, SPY, SPYV, NOBL Industry Exposure

Morning Star

Based on these exposure levels, PFM might be considered a cross between SPY and SPYV, mainly due to its high exposure to tech and consumer staples stocks. Notably, it lacks any meaningful exposure to energy and materials stocks, which are typically driven by commodities. This feature is a key reason why PFM has underperformed other large-cap dividend ETFs recently. This is also likely to continue. Because of the cyclical nature of commodity prices, stocks in these sectors are unlikely to hit a decade of consecutive dividend increases.

PFM’s top ten holdings represent a quarter of the ETF, as shown below. Microsoft (MSFT) is one of 26 tech stocks in the index, while three healthcare stocks make the list. They are UnitedHealth Group (UNH), Johnson & Johnson (JNJ) and Procter & Gamble (PG). Visa (V) and Mastercard (MA) are also considered tech stocks under the Global Industry Classification Standard.

Top 10 PFM Holdings

Invesco

historical performance

Historically, PFM has been closest to an S&P 500 value fund. It has almost the same annualized return, but it does have less volatility. As a result, its risk-adjusted return (Sharp and Sortino ratio) is slightly better. Still, PFM is lagging SPY by 2.89% per annum, which translates to 124% underperformance over 16.5 years.

PFM vs SPY vs SPYV Performance History

Portfolio Visualizer

To be fair, most of this underperformance has occurred in the past five years, and PFM has been a solid product until then. The chart below shows the sudden change in five-year rolling returns around 2016.

PFM vs SPY vs SPYV Rolling 5 Year Return

Portfolio Visualizer

ETF Analysis

Dividend Growth and Yield History

Since all the constituents have increased their dividends over a long period of time, I suspect the safety and consistency of the dividends is an issue. However, the extent of dividend growth is often an issue. PFM’s trailing yield is only 1.87%, so I think investors need some steady growth over time to be a worthwhile long-term investment. The chart below shows that this growth is minimal – the annualized growth rate over the past 15 years is just 5.19%.

PFM Dividend Growth History

find alpha

The growth in 2017-2018 almost canceled each other out, so the numbers can be difficult to interpret. Instead, I plotted the distribution over the past 12 months and included the yield on each ex-dividend date to get a better picture. You can see that distribution growth is not linear, but has grown at a reasonable rate over the past decade. From March 2012 to March 2022, the trailing allocation rose from $0.3339 to $0.7216, or 8.01% annualized. Sure, yields are more volatile, but it’s worth noting that they haven’t been this low since December 2017.

PFM's Dividend and Yield Over the Past 12 Months

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Dividend Scorecard

Seeking Alpha’s dividend rating for PFM is “A-“, but as mentioned, dividend growth is my main concern as I don’t think safety and consistency are an issue. To analyze this in more detail, I calculated the weighted average rating of the PFM top 20 industries, which make up about two-thirds of the ETF. The net rating for the entire ETF is at the bottom along with NOBL’s rating, which may be a reasonable option if you like long-term dividend growth.

PFM vs NOBL Dividend Scorecard - Data from Seeking Alpha

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Although PFM has 373 constituents, it has roughly the same concentration in the top 20 sectors as NOBL, which uses an equal-weight approach. In my opinion, it doesn’t make sense to choose PFM over NOBL for diversity purposes. However, PFM appears to be a better choice for dividend growth and safety, and its “B+” rating reflects this compared to NOBL’s “B” rating.

The constituents have a similar total dividend yield of 2.09%, but the three- and five-year dividend growth rates are higher. This stronger growth was helped by stocks in the data processing and outsourcing services, systems software, managed healthcare, semiconductor and healthcare equipment sectors. These combined accounted for 21.71% of PFM compared to 6.31% of NOBL.

Another positive feature is PFM’s lower payout ratio (42.33% vs. 53.06%). I use 60% as an approximate number that I consider safe (75% for utilities) and only 13.99% of the PFM ingredient weight exceeds this threshold. This number increases to 23.42% for NOBL, so I think PFM has more room to increase their dividend, all being equal.

Fundamental analysis

For my fundamental analysis, I’ll look at each ETF’s revenue and earnings growth rates and their valuations. I have added SPYV to the mix due to its historical performance similarities.

Industry Basic Profile - PFM, NOBL, .SPYV, data from Seeking Alpha

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The above table shows that all three funds have similar revenue and earnings growth rates, although SPYV is cheaper than PFM with its forward P/E ratio (21.08 vs. 21.70), trailing P/S ratio (4.17 vs. 4.96), and trailing price-to-cash flow ratio ( 18.03 vs 19.69). These differences are small, but they show no reason to pay 0.53% per year for a seemingly poor portfolio.

Against NOBL, PFM does seem to have an advantage. It has a larger market cap, which usually means better profitability, and it has a better growth rate and valuation (except for price sales). If you value dividend consistency, go for PFM, but that’s not my approach. Unless the fundamentals of the ETF are much better, I default to the lowest cost option. SPYV’s expense ratio is only 0.04%, resulting in only 0.59% of your total lost revenue from fees over ten years (assuming a 10% annual rate of return). By comparison, according to Larry Bates’ calculator, you would lose 7.67% of your profits to cover PFM fees.

T-Rex Score Calculator - How Much Fees Lost

Larry Bates

Investment Advice

For those who value dividend consistency, PFM is definitely better than NOBL. However, given that PFM’s historical returns are nearly identical to SPYV’s, I have a caveat with this approach. Its current portfolio is weak in terms of growth and valuation, and its 1.87% dividend yield is near an all-time low and unlikely to be a selling point for dividend investors.

The number of companies that have increased their payments for ten years in a row is too large to be an indicator of quality anymore. PFM is an average best dividend ETF with high fees and no additional quality screening. I don’t recommend it, and think you’re better off going with low-fee value ETFs.

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