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

If you're concerned about the longevity and reliability of your retirement savings, diversifying your portfolio with a dividend-focused ETF could be a wise move. The Invesco Dividend Achievers™ ETF (ticker: PFM) is one such option, designed to provide investors with exposure to companies that consistently grow their dividends. In this blog post, we'll delve into what PFM is, its pros and cons, and effective strategies for investing in it.

What is PFM?

PFM stands for Invesco Dividend Achievers™ ETF. It is designed to track the NASDAQ US Dividend Achievers™ Select Index. This ETF aims to include companies based in the United States that are known for their long track records of increasing dividends.

The NASDAQ US Dividend Achievers™ Select Index measures the performance of a select group of dividend-paying companies that have increased their annual dividend for ten or more consecutive fiscal years. This focus on consistent dividend growth, rather than merely high dividends, differentiates PFM from other dividend ETFs in the market.

Key Features of PFM

• Consistent Dividend Growth: Companies must have a history of at least ten consecutive years of increasing dividends.
• Market Capitalization: Companies must have a market cap of at least $500 million.
• Liquidity: Companies need to have a significant trading volume, ensuring that shares can be bought and sold easily in the market.

The selection process includes rigorous screening to ensure that companies show strong economic fundamentals such as stable earnings, sound financial statements, and a record of dividend increases.

PFM Composition

PFM includes household names and financially robust companies such as Microsoft (MSFT), PepsiCo (PEP), and Johnson & Johnson (JNJ). These companies are typically leaders in their industries and have proven track records of revenue and dividend growth. Primarily focusing on financially stable, large-cap companies, PFM minimizes exposure to highly volatile tech stocks and newly-established companies.

Pros of PFM

Consistent and Growing Dividends

An appealing aspect of PFM is its focus on companies that consistently increase their dividends. Historically, the companies included in this ETF have shown a strong commitment to returning capital to shareholders through steadily growing dividends. This provides a predictable and increasing income stream for long-term investors.

Diversification

PFM offers broad exposure to various sectors such as consumer staples, healthcare, industrials, and financials. This diversification can help investors mitigate sector-specific risks and benefit from a variety of market conditions.

Quality Companies

By focusing on companies with a long history of increasing dividends, PFM ensures that its portfolio consists of financially healthy and stable enterprises. This reduces investment risk and provides a cushion during economic downturns.

Low Management Fee

While the exact expense ratio may fluctuate, PFM’s expense ratio is relatively low compared to actively managed funds. This is particularly advantageous for long-term investors, as lower fees can significantly impact net returns over time.

Cons of PFM

Moderate Dividend Yield

One downside is PFM’s moderate dividend yield, typically around 2-3%. While this makes for a stable investment, other ETFs may offer higher yields, which could be more attractive to income-focused investors.

Limited Short-term Growth

PFM is primarily designed for those who seek long-term investment returns through capital appreciation and growing dividends. Short-term investors might find the ETF less appealing due to its lower potential for rapid stock price increases compared to more volatile growth-oriented investments.

PFM Investment Strategies

PFM is an excellent ETF for investors focused on long-term wealth accumulation and dividend income. Below, we'll discuss some investment strategies suitable for this ETF.

Long-term Investment Strategy

To fully leverage the benefits of PFM, a long-term investment horizon is crucial. Holding PFM for at least 10 years allows investors to benefit from the compounding effect of reinvested dividends and the stable growth of the underlying companies.

By gradually building your position in PFM and regularly reinvesting dividends, you can capitalize on the ETF’s consistent growth. Think of PFM as a cornerstone in a diversified retirement portfolio, particularly valuable for those planning for financial stability in their later years.

Dividend Reinvestment

One effective strategy is to reinvest the dividends you receive from PFM. This can amplify the compound growth effect, significantly enhancing your returns over time. Set up an automatic dividend reinvestment plan (DRIP) to streamline this process.

Dollar-Cost Averaging

Another practical approach is dollar-cost averaging, which involves investing a fixed amount of money in PFM at regular intervals. This strategy reduces the impact of market volatility and can help build a substantial position over time.

Combination with High-Yield ETFs

For investors seeking a balance between yield and growth, combining PFM with high-dividend-yield ETFs can be beneficial. This strategy provides both the stability of PFM and the higher income from ETFs focusing on immediate high yields.

Conclusion

PFM is a compelling option for long-term investors seeking consistent dividend growth and financial stability. While it may not offer the highest dividend yield or short-term capital gains, its focus on high-quality, dividend-growing companies makes it a strong candidate for retirement portfolios and those aiming to build wealth steadily over time.

Whether you choose to employ a long-term, dividend reinvestment, or dollar-cost averaging strategy, PFM can be a valuable addition to a well-rounded investment portfolio. Always remember to consider your own financial goals and time horizons before making any investment decisions.