JC Penney’s (NYSE: JCP) announcement Tuesday that it will discontinue its 20-cents-a-share quarterly dividend is a reminder that popular dividend ETFs come with different risks than bonds for income-seeking investors.
JC Penney shares fell more than 10% in after-hours trading after the company announced worse-than-expected quarterly results and suspended its dividend.
The stock is held in many retail and consumer discretionary sector ETFs, but these funds have about 1% or less in JC Penney shares.
Vanguard High Dividend Yield (NYSEArca: VYM) holds the stock but it accounts for only 0.12% of the portfolio, according to XTF.com. In other words, some dividend-themed ETFs may contain JC Penney but the position is negligible.
However, the news could unsettle investors who have moved into dividend ETFs to capture yield with rates so low in U.S. Treasury bonds and money market funds. Yields on the 10-year Treasury note are trading around 1.8%. [No Free Lunch: The Risks of Dividend ETFs]
Dividends aren’t guaranteed, while dividend ETFs also introduce volatility and risks to a portfolio that are different from investing in bonds. [Risks and Rewards of Dividend ETFs]