An ETF For Dividend Achievement

For all the talk about the potentially damaging effects of rising interest rates on high dividend strategies, some related exchange-traded funds notched impressive performances last year. That includes the PowerShares High Yld. Dividend Achv(ETF) PEY.

PEY returned 31.4 percent, or more than two and a half times the S&P 500's 2016 gain. Naysayers may be apt to say that defensive, high dividend ETFs thrived in the early parts of 2016 before waning in the year's latter stages, but just four trading days into 2017 it cannot be ignored that PEY is higher by nearly 10 percent over the past 90 days.

Paying Tribute To PEY

The $1.08 billion PEY, which turned 12 years old last month, tracks the NASDAQ US Dividend Achievers 50 Index.

“The NASDAQ Dividend Achievers 50 Index did not have material value exposure, but did have negative exposure to the growth factor (-0.43). More importantly, the index had a negative factor load (-0.90) to large-cap stocks, with 44 percent of its holdings in smaller-cap stocks. Thus, with the S&P SmallCap 600 Index outpacing the large-company S&P 500 Index by 10.35 percent from Nov. 8 through Dec. 16, the strong performance of the NASDAQ Dividend Achievers 50 Index is no great mystery,” said PowerShares in a recent note.

Allocations And Weights

Currently, PEY allocates more than 70 percent of its weight to large-, mid- and small-cap value stocks. As is the case with explicit value ETFs, the financial services and energy sectors figure prominently in PEY's lineup as those groups are the ETF's third- and fourth-largest sector weights, respectively, combining for over 31 percent of the fund's weight.

Even more impressive regarding PEY's recent bullishness is that the ETF devotes over 42 percent of its combined weight to utilities and consumer staples names, two of the most rate-sensitive sectors. Historical data indicate no sector is as inversely correlated to Treasury yields as utilities.

The hefty weight those high-yielding sectors, in part, explains PEY's trailing 12-month dividend yield of 3.1 percent. Adding to the ETF's income destination allure is a monthly dividend.

“To reiterate: While dividend-paying stocks may have surprised investors with their robust performance in the face of rising interest rates following the Nov. 8 election, much of this performance can be explained by factor tilts. In this case, exposure to value and smaller-cap stocks helped mitigate the impact of rising interest rates. As you can see, factors are not only valuable building blocks for constructing portfolios, but also useful tools for gauging portfolio performance,” according to PowerShares.

The average market cap of PEY's 50 holdings is over $45 billion.