Linking Financial Health and Dividend Durability | ETF Trends

By Coulter Regal, CFA, Associate Product Manager, VanEck Global

Near-term concerns have cropped up due to the COVID-19 pandemic, including fewer business activities, supply-chain disruptions and a slowing of the U.S. economy. Amid the crisis, falling stock prices have sent dividend yields soaring, but many companies may be forced to suspend or even trim dividends to preserve cash. Investors who focus only on the highest yielding stocks or rely on backward-looking statistics may find themselves holding shares of troubled companies that go on to cut or suspend their dividends and suffer painful share-price declines.

Just last week, automobile giant Ford announced the suspension of its dividends making it one of the first companies to take such measures during the pandemic.However, history is riddled with examples of well-known, long-time dividend payers who have been forced to cut dividends, including Vodafone, who raised dividends each year since 1998 then slashed payments 40% in 2019and the once synonymous blue-chip stock, General Electric (GE). GE struggled to navigate a changing market for power and electricity and was force to cut its dividend twice, once in November 2017 and again in October 2018,resulting in a combined dividend cut of 95%.

Dividend payers may serve investors best when investors screen for factors that may signal trouble ahead, such as financial health. The VanEck Vectors Morningstar Durable Dividend ETF (DURA) tracks Morningstar’s US Dividend Valuation Index, which evaluates financial health using Morningstar’s Distance to Default score. Distance to Default is a measure of financial health that considers a company’s balance sheet strength and equity market data to assess the likelihood of bankruptcy. Distance to Default has proven to be an effective predictor of dividend cuts: those companies with the lowest probability of default have had the lowest probability of future dividend cuts, according to Morningstar.

Morningstar’s recently published whitepaper “Health Screening for Dividend Payers” provides a deep dive on their Distance to Default measure and how it may help investors avoid companies with at-risk dividends. View the full whitepaper here.


2, 3 Source: Morningstar, Health Screening for Dividend Payers.

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