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Fearing a Cut in Current Income? 5 Safe Dividend ETFs

Sanghamitra Saha

Coronavirus-induced economic mayhem has suddenly ruined companies’ favorite ways of shareholders’ value maximization. There have been rampant cuts in share repurchases, one of the popular tools that kept Wall Street charged up in 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.

Energy companies are known for paying out high dividends. In the ongoing oil market rout, maintaining huge dividend payouts is a tall order. For instance, Occidental Petroleum OXY has announced a cut in its quarterly dividend payout for the first time in 30 years by 86% to 11 cents a share, effective July. Occidental Petroleum’s dividend yield was as high as 25.61% as of Apr 22 while Continental Resources Inc. CLR suspended dividends (read: Oil Firms May Cut Dividends Ahead: ETFs & Stocks in Focus).

March 2020 Dividend Announcements Turn Negative

Since share repurchases are seen as more discretionary than dividends, the first blow was dealt there. But dividends that are safer in nature are also not seeing a smooth stretch. The winning trend of huge dividend payments started to falter from March itself (read: Are Buyback ETFs in Troubled Waters?).

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. More cuts are likely. For U.S. common issues, the net-indicated dividend change was negative $5.5 billion. Last time it turned negative was in second-quarter 2009 (negative $4.9 billion), and the previous record low was also seen (negative $43.8 billion).

In the first six trading days of Q2, “there were 57 actions (none of them S&P 500 issues), with 7 positives and 50 negatives, and 40 of the 50 negatives being suspensions, amounting to a net change of USD -4.8 billion,” per S&P Dow Jones Indices.

Those with a still-existent dividend policy may record a sturdy yield. But one should not fall for the trap unless one is checking the company’s and sector’s fundamentals in the current stressed business scenario.

In order to pick some safer options, below we highlight a few dividend ETFs that have gained decently in the past month.

First Trust NASDAQ Technology Dividend Index Fund TDIV – Up 19.3% Past Month

The technology sector has been one of the best performers in the ongoing crisis. The underlying NASDAQ Technology Dividend Index includes up to 100 Technology and Telecommunications companies that pay a regular or common dividend. Thanks to the sector strength, this fund appears a strong bet. It yields 2.76% annually, way higher than the benchmark U.S. treasury yield of 0.63% (read: Oracle Posts Best Revenue Growth in 2 Years: ETFs in Focus).

Reality Shares DIVCON Leaders Dividend ETF LEAD – Up 24.2% Past Month

The underlying Reality Shares DIVCON Leaders Dividend Index invests in the largest U.S. companies by market capitalization that have the highest probability of dividend increase in the next 12 months. It yields 1.34% annually. IT and industrials form about 46% of the fund.

O'shares FTSE US Quality Dividend ETF OUSA – Up 21.8% Past Month

This one is a quality pick as the underlying index chooses stocks with strong balance sheets and profitability — the need of the hour now. Healthcare (21.42%) and Technology (14.38%) —currently the two best sectors — have a solid weight in the fund. Other good bets are Consumer Goods (16.55%) and Industrials (12.94%). It yields 2.85% annually.

Invesco Dividend Achievers ETF PFM – Up 19.3% Past Month

The underlying NASDAQ US Broad Dividend Achievers Index is designed to identify a diversified group of dividend-paying companies which have increased their annual dividend for 10 or more consecutive fiscal years. It yields about 2.50% annually (read: Play These Dividend Growth ETFs Amid Coronavirus Crisis).

FlexShares Quality Dividend Dynamic Index Fund QDYN – Up 21.3% Past Month

The underlying Northern Trust Quality Dividend Dynamic Index is designed to provide exposure to a high-quality income-oriented portfolio of long-only U.S. equity securities, with an emphasis on long-term capital growth and a targeted overall beta that is generally between 1.0 to 1.5 times that of the Northern Trust 1250 Index. Technology takes 28.9% of the fund, followed by Healthcare (14.3%). The fund yields a huge 4.46% annually.