Dividend stock-paying exchange traded funds may typically look attractive in this lower-for-longer yield environment, but the coronavirus pandemic has weighed on the strategy as more companies tighten their belts and cut dividends.
The Vanguard Dividend Appreciation ETF (NYSEArca: VIG), which is the largest dividend-related ETF and tracks companies with a history of growing dividends, has increased 10.7% over the past week, or slightly lagging behind the S&P 500’s rebound of 11.3%. The quality dividend ETF, though, has given up less, declining 11.5% year-to-date, compared to the S&P 500’s 14.8% drop off.
Meanwhile, investors have also been trimming exposure to these types of dividend-paying ETFs. For example, SPDR S&P Dividend ETF (SDY), which includes companies with a 20-year track record of raising dividends, has experienced $895 million in net outflows and iShares Select Dividend ETF (NYSEArca: DVY), which tracks companies with a 5-year record of paying dividends, lost $712 million in outflows so far this year, according to XTF data.
While these types of stocks have traditionally been a great play during periods of market volatility due a guaranteed return through regular dividends, some stalwart dividend-paying companies are beginning to suspend payments or cut back in response to the lean times.
“Companies with high sustainable cash flow, in traditional yielding sectors such as telecom, infrastructure & real estate investment trusts, are not expected to cut dividends, so when they do, it is a shock to investors,” Sat Duhra, co-fund manager Asian dividend income strategy at asset manager Janus Henderson, told CNBC.
For example, large financial institutions such as HSBC and Standard Chartered have canceled plans to make dividend payments for 2020, and Airbus and Rolls Royce also followed suit. Meanwhile, Exxon Mobile and Royal Dutch, which have paid reliable dividends in the past, have executed cuts in capital spending and raising additional funds, just to maintain their dividend promises.
There are also calls for U.S. banks to follow other countries in putting dividends on hold in light of the economic turmoil.
As we head into the earnings season, more companies may also announce cutbacks in response to the hit to company profits.
“Dividends tend to be linked to earnings”, Duhra added, “which gives companies room to reduce dividends if profits fall sharply.”
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