If you are a dividend investor, one of the easiest ways to cull your list of possible investments is to focus on companies with long histories of annual dividend increases. This is exactly the group of stocks you'll find in Invesco Dividend Achievers ETF (PFM -0.13%). But at the end of the day, this exchange-traded fund (ETF) isn't really a dividend investment. Here's why.
The devil is in the details on this ETF
Invesco Dividend Achievers ETF is a passively managed exchange-traded fund, meaning that it is designed to blindly follow an index. The index in question here is the "Nasdaq US Broad Dividend Achievers Index, which is designed to identify a diversified group of dividend-paying companies." To get on that list, a company needs to have increased its dividend annually for at least 10 consecutive years. The index is updated annually, and the market-cap-weighted ETF is rebalanced four times a year, though no single stock will be allowed to account for more than 4% of the total portfolio.
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So far, this should sound like a fairly interesting investment vehicle for a dividend-minded investor. But when you take a look at the modest 2% or so dividend yield on offer, you might have some questions. While that's higher than the yield you would get from an S&P 500 Index ETF (roughly 1.6%), it's not at all generous when you can probably find a bank CD that yields 4% or more. And you can easily find individual stocks with strong dividend histories and great businesses with much higher yields, like Procter & Gamble's 2.5% dividend yield, Kellogg's 3.5%, Franklin Resources' 4.5%, and on up to Enbridge's 7.1%. You get the idea -- there are a lot of stocks that have great dividend histories and higher yields than you'd get from Invesco Dividend Achievers ETF.
The problem is that this ETF uses dividend history as a quality screen.
A good dividend payer involves more than a string of dividends
Putting 10-plus years' worth of dividend increases together is not something that happens by accident. So being part of Invesco Dividend Achievers ETF is kind of a badge of honor in a way. If you are a dividend investor, the list of holdings would make a very good starting point for your own stock research. But that's all it would be -- a starting point. This is because dividend investing isn't monolithic; there are nuances. For example, some investors are looking to maximize their income streams, while others might be trying to find stocks with fast-growing dividends.
Both are contained in Invesco Dividend Achievers ETF, making it a terrible investment choice for either of these types of dividend investors. Some numbers may help. One of the ETF's largest holdings is Apple (AAPL -0.71%), which has a dividend yield of 0.6% or so. Sure, the dividend has grown at a compound annual rate of 17% over the past decade, but this stock will not likely interest an investor looking to create a large income stream.
At the other extreme, the list of holdings also includes Lincoln National (LNC 1.53%), which currently yields 8.6%. That high yield is at least partly related to the distress in the finance industry over the past month or so. Still, for investors looking to maximize their income streams, it would clearly be a more desirable option than Apple.
AAPL Dividend Per Share (Quarterly) data by YCharts
In the middle is a name like Cardinal Health (CAH -0.79%), which has a yield of around 2.9%. But Cardinal Health's dividend has grown at around 1% or so a year over the past one-, three-, and five-year periods. This stock probably isn't going to be too attractive for either dividend growth- or income-focused investors.
What these examples show is the wide variety of stocks that fall into Invesco Dividend Achievers ETF's list of holdings. While all of these names have proven they have businesses that can support a growing dividend over time, which is impressive, they don't necessarily coalesce into a good dividend portfolio. Thus, in the end, the 10-plus years of dividend increases needed to be included in the ETF ends up being a quality screen and nothing more.
Use the ETF as a crib sheet
If you are looking to own high-quality dividend-paying companies, Invesco Dividend Achievers ETF could be a good option for you. But if you are looking to find high-quality dividend growth stocks or high-yield stocks, this ETF will leave you owning stocks you wouldn't buy on your own. As a better option, you could use the holding as a list from which you cherry pick stocks that are right for your portfolio. Sure, it will be more work to buy individual stocks, but the personalized portfolio you create will be much more appropriate than what you'll get if you buy Invesco Dividend Achievers ETF.