What is PEY? (Pros, Cons, and Strategies)

If you're seeking robust income through dividend investments, PEY might be an investment worth considering. This ETF stands out for those looking to capitalize on high dividend yields from a diversified portfolio of U.S. stocks. In this blog post, we will delve into what PEY is, as well as its key advantages, disadvantages, and various investment strategies.

What is PEY?

PEY, the Invesco High Yield Equity Dividend Achievers™ ETF, is designed to provide exposure to U.S. stocks with high dividend yields and the propensity to increase dividends over time.

PEY tracks the NASDAQ US Dividend Achievers 50 Index, focusing on highly liquid companies with solid dividend growth potential rather than just high dividend payouts.

Unlike some dividend ETFs that simply chase high yields, PEY aims for a balance by selecting companies that not only offer high dividends but also demonstrate a consistent history of increasing their payouts. This dual strategy of high yield and dividend growth makes PEY a popular choice for income-focused investors.

Key Features of PEY

• Companies that have increased dividends for at least 10 consecutive years
• Companies with high dividend yields
• Inclusion of both large-cap and mid-cap stocks for better diversification

Stocks are selected based on their dividend yields and historical growth in dividends, ensuring a blend of high current income and potential for income growth.

PEY Composition

PEY comprises a diverse array of high-yielding companies, spanning industries from utilities to telecommunications and financials. This ETF emphasizes firms that have consistently increased their dividends, thereby offering investors a reliable income stream. The ETF excludes most tech stocks, which typically do not offer high dividend yields, focusing instead on more stable and mature companies.

Pros of PEY

High Dividend Yield

PEY is renowned for its high dividend yield, often exceeding 3.5% to 4.5%, making it an attractive option for income-seeking investors. This high yield can provide a substantial income, especially for retirees or those looking for periodic payouts.

Dividend Growth

PEY includes companies that have demonstrated a robust history of increasing their dividends over time. This ensures that investors are not only getting high current yields but are also positioned to see their income grow, which combats inflation over the long haul.

Diversification

PEY offers broad sector diversification, reducing the risk associated with investing in a single industry. By investing in a range of sectors, PEY can provide a buffer against market volatility.

Stable Income

By investing in commonly stable, dividend-paying companies, PEY tends to offer relatively stable dividend payments. This characteristic is ideal for conservative investors looking for a reliable income stream.

Cons of PEY

Higher Expense Ratio

PEY has a higher expense ratio compared to some other dividend ETFs, usually around 0.52%. While this fee covers the cost of fund management, it could eat into your net returns over the long term.

Potential for Capital Loss

Although PEY provides a high dividend yield, the stock prices of high-yield companies could be more volatile. Investors might experience capital losses, particularly in periods of economic downturn or market volatility.

Lower Growth Potential

The focus on high-dividend companies means that PEY has a lower allocation to tech and growth stocks, which have historically provided higher capital appreciation. Therefore, PEY might not be the best choice for investors looking for high growth in their principal investment.

PEY Investment Strategies

Given its focus on high dividend yield and dividend growth, PEY is well-suited for certain investment strategies.

Long-term Income Strategy

PEY is ideal for investors aiming for a long-term income strategy. By holding PEY for a substantial period, investors can enjoy not only high dividends but also the potential for dividend increases. This strategy helps in building a reliable income stream for retirement or for supplementing regular income.

Dividend Reinvestment

To maximize the benefits of PEY, investors can reinvest the dividends received. By doing so, they can take advantage of compounding, which significantly enhances the growth of their investment over time. This strategy is particularly effective for investors with a long-term horizon.

Diversified Portfolio Component

PEY can serve as a stabilizing component in a diversified portfolio. Its focus on high-dividend and mature companies can provide ballast against more volatile growth stocks, ensuring that the investor's portfolio remains balanced and less susceptible to market swings.

Income-Focused Retirement Planning

For those planning for retirement, PEY offers an excellent way to generate consistent income. Its combination of high yield and dividend growth makes it suitable for constructing a retirement income plan aimed at providing steady payouts.

Conclusion

PEY, the Invesco High Yield Equity Dividend Achievers™ ETF, presents a robust option for investors seeking high dividend yields combined with the potential for income growth. While it has its share of drawbacks, such as a higher expense ratio and lower growth potential, its benefits make it a notable candidate for those focused on income stability and long-term dividend growth.

By leveraging strategies tailored to their specific needs, investors can maximize the advantages of PEY, from creating a solid retirement income stream to ensuring their portfolios are well-diversified.