Invesco Aerospace & Defense ETF (PPA): Dividend Growth Signals Resilience in a Booming Sector

The Invesco Aerospace & Defense ETF (PPA) recently announced a 3% increase in its annualized dividend rate, raising it from $0.63 to $0.65 per share. This marks a positive step for income-focused investors, but the question remains: can PPA sustain this growth amid a sector that is both dynamic and volatile? Let's dissect the ETF's dividend sustainability, sector tailwinds, and valuation risks to determine its investment merit.

The Dividend Increase in Context

PPA's dividend history since 2020 has been marked by significant volatility. Quarterly payouts have surged and slumped in tandem with geopolitical tensions and defense spending cycles. For example, in late 2022 and 2023, dividends spiked over 100% quarter-over-quarter, only to drop sharply in subsequent periods (see dividend timeline below). The June 2025 increase, however, represents a modest but steady upward adjustment from $0.63 to $0.65 annually, aligning with a trend of gradual stabilization.

Sector Tailwinds Fueling Growth

PPA tracks the SPADE Defense Index, which holds companies like Lockheed Martin, Raytheon, and Boeing—firms deeply embedded in U.S. defense priorities. Geopolitical risks, including tensions in the South China Sea and Eastern Europe, have driven a global defense spending boom. The U.S. military budget alone is projected to grow by 4.5% in fiscal 2025, supporting PPA's holdings.

This sector momentum is reflected in PPA's performance. While the ETF's trailing 12-month dividend yield remains low at 0.5%, its forward yield (0.47%) hints at potential upside. More importantly, the defense sector has outperformed broader markets in recent years, as evidenced by PPA's outperformance of the S&P 1500 Aerospace & Defense Index by 12% as of June 2024.

Valuation and Structural Considerations

PPA's expense ratio of 22% is higher than many broad-market ETFs, reflecting its niche focus and full replication strategy. This cost structure could compress long-term returns, especially if dividend growth stalls. Additionally, the ETF's non-diversified status—meaning it can invest heavily in a few sectors or stocks—heightens concentration risk. Investors must weigh these factors against the ETF's potential to capitalize on defense spending tailwinds.

Risks and Caution Flags

1. Dividend Volatility: PPA's dividend history shows sharp fluctuations, including an 84% drop in March 2025 compared to December 2024. This underscores reliance on quarterly earnings and sector-specific events, which can be unpredictable.
2. Premium/Discount Risk: As an actively managed ETF, PPA's shares may trade at premiums or discounts to its net asset value (NAV). Investors should monitor this to avoid overpaying.
3. Geopolitical Overhang: While defense spending is robust, a sudden de-escalation of global conflicts could reduce demand for PPA's holdings.

Investment Thesis and Recommendations

Buy for Long-Term Exposure: PPA remains a compelling play on the aerospace and defense sector's structural growth. The June dividend increase signals confidence in the sector's fundamentals, and geopolitical dynamics suggest this demand will persist. Investors with a multi-year horizon may find PPA a valuable addition for sector diversification.

Hold for Income Focus: While the dividend yield is modest compared to other sectors, the 3% increase offers better stability than recent dips. Income investors should prioritize PPA's growth trajectory over its current yield.

Avoid if Risk-Averse: The ETF's high expense ratio, concentration risk, and dividend volatility make it less suitable for conservative portfolios.

Final Take

PPA's dividend increase is a welcome sign of resilience in a sector primed for growth. While risks like valuation and volatility remain, the ETF's alignment with U.S. defense priorities positions it to benefit from sustained spending. For investors willing to navigate these risks, PPA offers a targeted way to capitalize on a sector with both defensive and offensive appeal.

In conclusion, PPA's dividend sustainability hinges on the defense sector's health, which appears robust for now. Monitor geopolitical developments and the ETF's NAV discount/premium closely, but consider PPA a strategic holding for those invested in the long game of global defense spending.