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Is Fear for Dividend Cuts Overblown? ETFs to Benefit
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Coronavirus-induced economic mayhem has flared up investors’ concerns about companies’ ability to maximize shareholder value going forward. The fears do have reasons. There have been rampant cuts in share repurchases, one of the popular tools to have charged up Wall Street time and again for all these years.
Even promised dividends have not been safe lately. Liquidity crisis at corporations calls for prudent cash management and has led to such a step. Per S&P Dow Jones Indices, March 2020 dividend announcements were negative. There were 13 cuts, with 10 being suspensions, making for a total forward impact of $13.9 billion.
Last time it turned negative was in second-quarter 2009 (negative $4.9 billion). So far in the second quarter, 12 S&P 500 companies cut their dividends and another 12 adjourned them, per the index strategist with S&P Dow Jones Indices.
Is Everything Gloomy on the Dividend Front?
Probably not.Michael Wilson, chief U.S. equity strategist at Morgan Stanley indicated that bullishness has been noticed in the dividend futures market, which reflects investor views about future dividend payments by the S&P 500 companies.
Per Morgan Stanley, prices in the dividend futures market have shown better correlation with stock prices than actual earnings forecasts. Dividend futures market currently shows the market expecting company dividends to fall 15% this year versus a 23% decline during the Great Financial Crisis.
Wilson went on to indicate that dividend cuts have been way fewer than hikes in the year-to-date frame. About 133 S&P 500 companies have raised dividends this year compared with only 38 slashing or suspending them. Most dividend hikes came from the financial sector. Of the 19 companies to up dividends in the second quarter, six belonged to the financial sector.
Morgan Stanley believes that implied 15% haircut in S&P 500 dividends “may overstate the likely dividend cuts this year.” “Dividend futures have already bottomed and rebounded sharply, which is in sharp contrast to the [the next 12 months’] EPS forecasts,” according to the note.
Overall, the S&P 500 investors should expect a 4% to 5% cut in dividends this year, per S&P Dow Jones Indices’ strategist. So, it is better not fall for the yield trap as high returns are always involved with high risks. It is better to go for quality picks or for the stocks that have strong financials which can continue to support dividend payments over the long term. Dividend growth stocks are good bets in this regard (read: Guide to 10 Most Popular Dividend ETFs).
The underlying S&P High Yield Dividend Aristocrats Index measures the performance of the highest dividend yielding S&P Composite 1500 Index constituents that have followed a managed-dividends policy of consistently increasing dividends every year for at least 20 consecutive years. Financials, Industrials, Consumer Staples and Utilities have a double-digit weight in the fund. It yields 3.27% annually (read: Dividend Growth ETFs for Long Term Investors).
The underlying S&P Technology Dividend Aristocrats Index targets companies from information technology, Internet and direct marketing retail, interactive home entertainment, and interactive media and services segments of the economy. The dividend yield of the index is 2.37% annually (read: Forget Slump, Buy Tech ETFs That Offer Value).
The underlying NASDAQ US Dividend Achievers Select Index consists of common stocks of companies that have a record of increasing dividends over time. Industrials, Consumer Services, Consumer Goods and Technology are the top four sectors of the fund. It yields 1.89% annually.
This product provides exposure to companies that have hiked dividends for at least 25 consecutive years, with most doing so for 40 years or more. Industrials is the top sector with about one-fourth of the exposure while Consumer Staples, Materials, Consumer Discretionary and Financials also have double-digit weight in the fund. It has a 2.47% dividend yield.
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Is Fear for Dividend Cuts Overblown? ETFs to Benefit
Coronavirus-induced economic mayhem has flared up investors’ concerns about companies’ ability to maximize shareholder value going forward. The fears do have reasons. There have been rampant cuts in share repurchases, one of the popular tools to have charged up Wall Street time and again for all these years.
Even promised dividends have not been safe lately. Liquidity crisis at corporations calls for prudent cash management and has led to such a step. Per S&P Dow Jones Indices, March 2020 dividend announcements were negative. There were 13 cuts, with 10 being suspensions, making for a total forward impact of $13.9 billion.
Last time it turned negative was in second-quarter 2009 (negative $4.9 billion). So far in the second quarter, 12 S&P 500 companies cut their dividends and another 12 adjourned them, per the index strategist with S&P Dow Jones Indices.
Is Everything Gloomy on the Dividend Front?
Probably not.Michael Wilson, chief U.S. equity strategist at Morgan Stanley indicated that bullishness has been noticed in the dividend futures market, which reflects investor views about future dividend payments by the S&P 500 companies.
Per Morgan Stanley, prices in the dividend futures market have shown better correlation with stock prices than actual earnings forecasts. Dividend futures market currently shows the market expecting company dividends to fall 15% this year versus a 23% decline during the Great Financial Crisis.
Wilson went on to indicate that dividend cuts have been way fewer than hikes in the year-to-date frame. About 133 S&P 500 companies have raised dividends this year compared with only 38 slashing or suspending them. Most dividend hikes came from the financial sector. Of the 19 companies to up dividends in the second quarter, six belonged to the financial sector.
Morgan Stanley believes that implied 15% haircut in S&P 500 dividends “may overstate the likely dividend cuts this year.” “Dividend futures have already bottomed and rebounded sharply, which is in sharp contrast to the [the next 12 months’] EPS forecasts,” according to the note.
Nineteen S&P 500 companies increased their dividends during April despite the coronavirus crisis. Gold miner Newmont (NEM - Free Report) , consumer staples firm Costco Wholesale (COST - Free Report) and information technology giant Apple (AAPL - Free Report) are the dividend jewels right now. The average dividend hike by these companies is 8.4%.
What About Dividend ETFs?
Overall, the S&P 500 investors should expect a 4% to 5% cut in dividends this year, per S&P Dow Jones Indices’ strategist. So, it is better not fall for the yield trap as high returns are always involved with high risks. It is better to go for quality picks or for the stocks that have strong financials which can continue to support dividend payments over the long term. Dividend growth stocks are good bets in this regard (read: Guide to 10 Most Popular Dividend ETFs).
SPDR S&P Dividend ETF (SDY - Free Report)
The underlying S&P High Yield Dividend Aristocrats Index measures the performance of the highest dividend yielding S&P Composite 1500 Index constituents that have followed a managed-dividends policy of consistently increasing dividends every year for at least 20 consecutive years. Financials, Industrials, Consumer Staples and Utilities have a double-digit weight in the fund. It yields 3.27% annually (read: Dividend Growth ETFs for Long Term Investors).
ProShares S&P Technology Dividend Aristocrats ETF (TDV - Free Report)
The underlying S&P Technology Dividend Aristocrats Index targets companies from information technology, Internet and direct marketing retail, interactive home entertainment, and interactive media and services segments of the economy. The dividend yield of the index is 2.37% annually (read: Forget Slump, Buy Tech ETFs That Offer Value).
Vanguard Dividend Appreciation ETF (VIG - Free Report)
The underlying NASDAQ US Dividend Achievers Select Index consists of common stocks of companies that have a record of increasing dividends over time. Industrials, Consumer Services, Consumer Goods and Technology are the top four sectors of the fund. It yields 1.89% annually.
ProShares S&P 500 Dividend Aristocrats ETF (NOBL - Free Report)
This product provides exposure to companies that have hiked dividends for at least 25 consecutive years, with most doing so for 40 years or more. Industrials is the top sector with about one-fourth of the exposure while Consumer Staples, Materials, Consumer Discretionary and Financials also have double-digit weight in the fund. It has a 2.47% dividend yield.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>