High-yield dividend exchange traded funds offer attractive yields for the income-strapped investor, but the higher payouts come with risks, such as potentially unsustainable dividends from a beleaguered energy sector.
“A lot of companies have adopted dividend policies that are unsustainable and have been rewarded by the financial markets that don’t sufficiently question the sustainability,” Harald Otterhaug, the head of Oslo Asset Management, told CNBC.
Otterhang attributed the unsustainable dividend policies to easy access to credit markets and equity markets, which caused many to realize that the dividends were a result of a return of capital rather than a return on capital, and there was not much capital left to dish back.
“We believe that longer term, in order for production to be economical, oil prices need to go significantly higher, but it is a big question mark when and how that happens,” Otterhaug added.[related_stories]
The potentially unsustainable dividend payouts in the energy sector could pressure more so-called high dividend ETFs that weigh components based on payouts. For instance, iShares Core High Dividend ETF (NYSEArca: HDV) has an attractive 3.64% 12-month yield, but the fund includes a 21.1% tilt toward the energy sector.