As the financial crisis continues to leave no economic stone unturned, dividend-slicing could affect exchange traded funds (ETFs) that hold the stocks of such companies.
Investors love those quarterly dividends, and they account for more than one-third of shareholders’ long-term gains, reports Renita Jablonski for Marketplace. But as the credit crisis spreads wide, many companies are cutting them by as much as half in the case of Bank of America (BAC) and Citigroup (C).
The companies don’t like doing this, because it raises a red flag about their balance sheets. But now it’s looking more and more like it’s what has to be done, because many of these companies want to have cash on hand in case they can’t get it anywhere else.
These suspensions hurt investors, particularly retirees, who depend on the checks for income. If they aren’t getting the cash, they may have to sell the stock, which could be at a lower price.
Eleanor Laise for the Wall Street Journal cautioned about dividend ETFs a few weeks ago, as some of them (not all) are heavily weighted in financials – a sector that has been particularly battered by the crisis. It’s important to look at the weightings, especially when there’s a single sector that’s been badly affected:
- iShares Dow Jones Select Dividend Index (DVY): down 21.2% year-to-date; has 50.4% of its weighting in financials (black line)
- PowerShares High Yield Dividend Achievers (PEY): down 21.4% year-to-date; holds 76.2% of financials (green line)
Among the funds that have smaller weightings in financials include:
- Vanguard Dividend Appreciation (VIG): down 24.9% year-to-date; 11% in financials (black line)
- WisdomTree Total Dividend (DTD): down 29.9% year-to-date; 29.5% in financials (green line)
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.