As the environmental, social, and governance (ESG) investing phenomenon evolves, it is encroaching upon a variety of segments.
While the move is still nascent, increasing attention is paid to ESG’s applications in the world of equity income or dividends. One exchange traded fund that appears up to that challenge is the Invesco Dividend Achievers ETF (NASDAQ: PFM).
PFM follows the NASDAQ US Broad Dividend Achievers Index, which requires member firms to have payout increase streaks of at least 10 years. That’s attractive in its own right, but PFM may have more ESG chops than meet the eye.
“ESG investing has been growing strongly in recent years as more investors push firms to be good corporate citizens, whether it’s more inclusive, cutting down on pollution, or making boards of directors more accountable to shareholders,” reports Lawrence Strauss for Barron’s. “Options for incorporating ESG with equity income, however, have been somewhat limited for individual investors when it comes to indexes and mutual funds.”
PFM ESG Credibility
Due to the 10-year increase streak requirement, assuming PFM is heavy on carbon-intensive industries would be reasonable. However, energy dividends were trimmed during oil’s last bear market, and that sector is just 3.36% of PFM’s roster – the second-smallest sector weight in the fund.
That’s one ESG point in PFM’s favor. Another is that the fund is home to several dividend payers that appear on a Morningstar screen of dividend stocks with favorable ESG traits. That group includes Home Depot (NYSE: HD), PFM’s largest consumer discretionary holding.
The Morningstar list cited by Barron’s includes PepsiCo (NASDAQ: PEP) and Texas Instruments (NASDAQ: TXN), both PFM holdings. Add Home Depot to the group, and the trio combine for almost 5% of PFM’s weight.
None of PFM’s holdings exceed weights of 4.67%. Regarding the stake in semiconductor maker Texas Instruments, technology – a sector that traditionally scores well on ESG – is PFM’s largest sector weight at 17.4%.
Even PFM’s utilities exposure has a little ESG in the mix thanks to a 1% allocation to NextEra (NYSE: NEE), which has one of the more vibrant renewables platforms in the sector. Overall, it’s a positive to blend to dividends, and ESG and data confirm as much.
“For example, from the end of 2005 through June 2019, the top 20% of companies in terms of dividend yield among the stocks covered by BofA Securities had an annual return of 8.4%, according to the company. But when that yield factor was blended with good ESG scores, the annual return was 9.8%,” according to Barron’s.
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