Every month, we publish the list of the top 100 Dividend Yields in the S&P500. We have also published lists of the top dividend ETF’s and yesterday I did some research to see who was currently at the top of that list. The one on top is PPH, a Pharmaceutical Holders Trust, which came out with a dividend yield of 12.67%. That seemed high didn’t it? Having done the top 100 dividend stocks just a few days ago, I was pretty confident the dividend yield did not make sense. So I looked around the web and other websites such as Bloomberg and ETFreplay had the same very high yield.
What is PPH?
“The Pharmaceutical HOLDRS Trust issues depositary receipts called Pharmaceutical HOLDRS, representing an undivided beneficial ownership in the United States-traded common stock of a group of specified companies that are involved in various segments of the pharmaceutical industry.” First off on my list to look into the dividend yield was understanding PPH. What is inside of it? How much dividends do the underlying stocks pay? Many ETF’s and almost all funds only reveal their positions in quarterly reports but some others such as this one gives out details every day (mostly because this specific one does not change over time in “normal circumstances”). So I went on the official website and the list of stocks was right there, easy to get:
[table “117” not found /]
Most of these stocks pay decent dividend yields but nowhere near the yield that PPH has paid in the last year. First off, I went to get out the current dividend yield for all of the stocks that constitute PPH:
[table “118” not found /]
So no, there is no way for an ETF that includes all of these stocks to pay out 12.67% of dividend yield as not even one of the stocks inside of it pays that amount.
So what happened then?
I decided to take a look at how PPH dividends are paid out. Turns out that it is even easier than most ETF’s. Every single time one of its stocks becomes ex-dividend, PPH also becomes ex-dividend. So yes it ends up paying multiple dividends in a few days sometimes. For example, PPH will become ex-dividend on June 11th, a dividend of 0.10928$. Where does that amount come from? Take a look at this chart with a bit more details:
[table “119” not found /]
On June 11, Merck & Co will become ex-dividend. If you multiply the number of shares per unit x the payout= 0.3007 x $0.39 = $0.117
PPH will be paying $0.1093, which seems to include some fees (contrary to many funds, PPH and other Holders Trust pay fees through their dividends since they do not have cash).
So what is the catch?
What screws up everything is that PPH had a special one time payment of $1.47 in November 2009, a payment that greatly influenced the dividend payout but is not likely to repeat and is certainly not sustainable. So no, PPH’s true dividend yield is nowhere near 12.67%.
So what is PPH’s dividend yield?
It would simply be the sum of each stock included dividend yield x it’s weight in the ETF. Take a look at the chart below:
[table “120” not found /]
So what is PPH’s dividend yield? A still respectable 3.17%. Nowhere near the number presented above but still good enough to consider investing. So please be careful when investing in an ETF or any other stock by basing yourself only on the dividend yield, there is much more to it.