Dividend Payout Strategies: Underappreciated Casualty Of Balance Sheet Diet
Should this scenario play out, then a Fed “pause” on further rate hikes would open a window for over-leveraged corporations to improve their balance sheets through lender-friendly capital decisions at the expense of shareholder-friendly activities.
ETFs focused on dividend strategies could be at risk should this course correction in capital allocation take place.
Figure 3 displays the top 10 dividend-focused ETFs ranked by assets under management, according to ETF.com. We also show the S&P 500 Index as proxied by the SPDR S&P 500 ETF Trust (SPY). We calculated the portfolio-weighted credit rating exposures based on the senior unsecured credit ratings assigned by Moody’s and S&P.
Figure 3: Many Dividend-Focused ETFs Have Embedded Credit Risk
|AUM ($M)||Expense Ratio||Projected Yield||Moody Sr. Unsecured||S&P Sr. Unsecured|
|BBB & Below||A & Above||BBB & Below||A & Above|
|ISHARES SELECT DIVIDEND ETF (DVY US)||21,990||0.08%||4.08||59.29||26.44||53.94||37.46|
|VANGUARD HIGH DIVIDEND YIELD ETF (VYM US)||16,980||0.39%||3.34||33.67||58.35||28.66||67.46|
|SPDR S&P DIVIDEND ETF (SDY US)||16,040||0.35%||3.05||36.69||37.63||36.86||46.20|
|SCHWAB US DIVIDEND EQUITY ETF (SCHD US)||7,960||0.07%||3.29||29.04||64.28||21.86||71.56|
|ISHARES CORE HIGH DIVIDEND ETF (HDV US)||6,780||0.08%||3.42||22.57||73.84||20.02||77.76|
|FIRST TRUST VALUE LINE DIVIDEND INDEX FUND (FVD US)||4,600||0.70%||3.38||38.05||41.61||34.01||54.10|
|FIRST TRUST MORNINGSTAR DIVIDEND LEADERS INDEX (FDL US)||1,460||0.45%||4.28||40.91||54.97||31.06||67.80|
|OPPENHEIMER S&P ULTRA DIVIDEND REVENUE ETF (RDIV US)||1,200||0.39%||4.56||56.68||30.13||57.87||40.05|
|WISDOMTREE US HIGH DIVIDEND (DHS US)||890||0.38%||4.17||36.78||50.04||37.02||58.32|
|INVESCO HIGH YIELD EQUITY DIV ARCHIEVERS ETF (PEY US)||726||0.54%||4.70||57.55||21.82||49.63||36.98|
|SPDR S&P500 ETF TRUST (SPY US)||251,830||0.10%||2.03||33.29||55.25||31.87||62.16|
Sources: Bloomberg and ETF.com (as of 12/13/2018)
What the table shows is that many of these dividend-focused ETFs have heightened embedded credit risk. Granted, the S&P 500 has roughly a third of its portfolio in issues rated BBB and below, but the index concentrates its exposures to market capitalization rather than dividends. Since dividend-focused ETFs are delivering “participation” in dividend-paying risk, they are more susceptible to a shift in capital allocation policies that prioritize debtholders over equity shareholders.
Go Back To Eating Steak?
Are dividend policies and share repurchases sacrosanct? If the broader macro environment recovers, then perhaps Corporate America can go back to eating steak. But if push comes to shove, corporations will likely follow the direction from the credit agencies and risk the ire of shareholders.
Time will tell, and we may see fallen angel risk remain a predominant risk in 2019, but the Fed appears to be giving a window for over-levered companies to get their houses in order.
As of the time of this writing, 3D Asset Management held VYM, SDY, SCHD and SPY across the firm’s managed accounts. The above is the opinion of the author and should not be relied upon as investment advice or a forecast of the future. The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. It is not a recommendation, offer or solicitation to buy or sell any securities or implement any investment strategy. It is for informational purposes only. The above statistics, data, anecdotes and opinions of others are assumed to be true and accurate; however, 3D Asset Management does not warrant the accuracy of any of these. There is also no assurance that any of the above is all inclusive or complete. Past performance is no guarantee of future results. None of the services offered by 3D Asset Management are insured by the FDIC, and the reader is reminded that all investments contain risk. The opinions offered above are as of Dec. 14, 2018, and are subject to change as influencing factors change. More detail regarding 3D Asset Management, its products, services, personnel, fees and investment methodologies are available in the firm’s Form ADV Part 2, which is available upon request by calling (860) 291-1998, option 2, or emailing [email protected] or visiting 3D’s website at www.3dadvisor.com.