PID: Generating Decent Yield And Return Through Investing In Core Sectors

The Invesco International Dividend Achievers ETF (NASDAQ:PID) invests in securities of companies belonging to the core sectors of resource rich countries like Canada, Brazil, Australia, and Mexico. The fund generates a decent yield around 4 percent, and an annual average total return in the double digits. The fund invests only in those stocks that are consistent with their dividend payments, thus almost guaranteeing the sustainability of its yield. PLD has a strong asset base, bears a low level of risk, and has a balanced portfolio that is also aimed at generating decent price growth over a longer period of time. Its investment strategy is most likely to suit both income seeking investors and growth seeking investors.

PID is Based on Nasdaq International Dividend Achievers Index

Invesco International Dividend Achievers ETF invests in dividend-paying common stocks and other securities that are included in the Nasdaq International Dividend Achievers Index. This index is composed of American Depository Receipts (ADRs), Global Depositary Receipts (GDRs) and common or ordinary equity stocks available in international markets that fulfill the set criteria of this Dividend Achievers Index. One of the critical eligibility criteria for these companies is that they must be consistent in increasing their annual regular cash dividend payments for the last 5 consecutive years. Both PID and DAT are reconstituted once-a-year during March and rebalanced on a quarterly basis during March, June, September and December.

ADRs represent an easy, liquid way for US based investors to own foreign stocks. These are negotiable certificates issued by a US based bank that represents a specified number (usually one) of shares in a foreign stock. ADRs trade on American stock exchanges and their dividends are priced in U.S. dollars. US investors are able to purchase stock in overseas companies through investing in ADR of that particular stock, that would not have been available otherwise. GDRs on the other hand allows US based companies to list in the domestic stock exchanges of other countries. GDRs are priced in the domestic currencies of the exchanges, as are their dividends. GDRs thus can be viewed as an easy way for international investors to own US based stocks. However, unlike ADR, GDR can be issued in any market by ay foreign firms, and are not limited to US markets only.

PID’s Portfolio Consisted of Core Sector Firms from Resource Rich Countries

The portfolio of Invesco International Dividend Achievers ETF is boosted by stocks from core sectors, i.e., materials, utilities, energy, industrials, and financials. Portfolio has a total of 47 stocks, and almost 65 percent is invested in these five sectors. The fund pays a quarterly dividend and generates a trailing-twelve-months (TTM) yield of 4.11 percent. The annual average total return (during 2016 -2021) stood at 10.3 percent. PID has an asset under management (AUM) of $900.6 million. The expense ratio is relatively high at 0.53 percent. If we look at PID’s geographical distribution, maximum investments are made in those countries which are rich with various types of natural resources, not necessarily oil and gas. 65 percent of its assets are invested in equity markets of Canada, Brazil, Australia, and Mexico. Remaining funds are invested in Developed markets of Japan and Western Europe.

Why is this regional distribution an important factor? Out of this 65 percent investment made in these four markets, maximum investment is made in those core sectors – materials, utilities, energy, industrials, and financials. At present, half of the portfolio is invested in 20 stocks namely Algonquin Power & Utilities Corp. (AQN), Brookfield Renewable Partners L.P. (BEP), Brookfield Infrastructure Partners L.P. (BIP), Fortis Inc. (FTS), Banco Santander Brasil S.A. (BSBR), Canadian Imperial Bank of Commerce (CM), The Toronto-Dominion Bank (TD), Royal Bank of Canada (RY), Brookfield Corp. (BN), Enbridge Inc. (ENB), TC Energy Corp. (TRP), Canadian Natural Resources Ltd. (CNQ), Imperial Oil Limited (IMO), Rio Tinto (RIO), Agnico Eagle Mines Ltd. (AEM), Ritchie Bros. Auctioneers (RBA), Canadian National Railway Co. (CNI), Stantec Inc. (STN), TFI International Inc. (TFII), and Canadian Pacific Railway Ltd. (CP).

How These Core Sector Stocks in those Four Markets Perform Historically

Invesco International Dividend Achievers ETF recorded double digit average growth during the period between 2016 and 2021. However, 2022 has been poor for this fund, as it suffered a price loss of 7 percent. During the past 5 years, 10 out of these 20 stocks grew in excess of 6 percent compounded annual growth rate (CAGR). During this period, TFII grew by 32 percent-CAGR, while CP, RBA, IMO, CNQ and STN grew between 9 and 15 percent-CAGR. Only four of these above-mentioned 20 stocks recorded negative growth during this period, and that also within a range of 3 to 8 percent.

Still, the price return of PID’s overall portfolio was less than one percent over the past 5 years. This implies that PIDs investments in other markets and also in the remaining sectors have failed to deliver reasonable growth. The fund has invested in those stocks purely because of their ability to deliver consistent dividend pay-out. As mentioned earlier, PID invests only on those stocks that have increased their aggregate annual regular cash dividend payments consistently for at least each of the last five consecutive years.

Investment Thesis

In my opinion, Invesco International Dividend Achievers ETF is an attractive fund. According to my “7 Factor Model for Evaluating Global Funds”, PID qualifies in most criteria. It has an AUM, stock price, and total return much better than the minimum requirements. Although historical yield has been lower than required 5 percent, still it’s close enough. The portfolio is not well diversified throughout sectors, but concentrated only in a few economies. The prime driver of this fund is that its assets are invested in core sector (materials, utilities, energy, industrials, and financials) firms in equity markets of resource rich countries such as Canada, Brazil, Australia, and Mexico.

Invesco International Dividend Achievers ETF at present is trading at a negligible premium of 0.13 percent over its net asset value (NAV). I expect this fund to sustain its current level of yield, as it invests only in those stocks that are consistent with their dividend payments. The default risk of this fund is also quite low due to the above-mentioned factors. However, at the same time, the core portfolio (core sector firms in resource rich countries) of this fund has generated strong price growth over the past 5 years. Its investment strategy is most likely to suit both income seeking investors and growth seeking investors. Thus, in an environment of low economic growth, I am bullish about this fund.