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The Bell Tolls for Energy Dividends, ETFs


Tuesday’s news that Freeport-McMoRan (FXC) is slashing its quarterly dividend to 5 cents per share from 31.25 cents is igniting scuttlebutt that other natural resources companies will follow suit.

Freeport is commonly viewed as a copper produce and, to a lesser extent, a gold miner. However, by way of its 2013 acquisition of McMoRan Exploration, the company is also an oil and gas producer. That means Freeport’s negative dividend news has investors speculating about the next energy company to cut payouts.

That speculation comes just weeks before Dow components Exxon Mobil (XOM) and Chevron (CVX), the two largest U.S. oil companies, usually raise dividends.

Each of those companies have dividend increase streaks of at least 25 years (Exxon’s dividend increase streak is 32 years) , which qualify them for admission into the S&P 500 Dividend Aristocrats Index. That index is tracked by the fast-growing ProShares S&P 500 Aristocrats ETF (NOBL) .

The ability of Chevron and Exxon to continuing raising dividends as oil prices plummet is important because while Wall Street and Main Street have been somewhat tolerant of the companies’ plans to trim exploration and production spending and suspend buybacks, not extending dividend increase streaks would universally be seen as a negative. [ETFs for Upcoming Dividend Increases]

Exxon is the largest S&P 500 dividend payer in dollar terms, having paid out nearly $11.6 billion in dividends on a trailing 12-month basis , according to FactSet data. Only six companies, including Exxon, paid more in dividends over that period than the $7.9 billion paid by Chevron.

Exxon and Chevron boosted dividends by 9.5% and 7%, respectively, last year and while expectations are in place for more modest increases this year, the companies need to honor those expectations, no matter how token their dividend increases are.

One way of looking at the importance of Exxon and Chevron maintaining their dividend increase streaks is this: Sure, dividend cuts are bad, but in the case of these companies, not extending lengthy dividend increase streaks could garner the same treatment from Wall Street as an outright cut. Put simply, the message, for now theoretical, from Exxon and/or Chevron not maintaining payout increase streaks is bad and that is not up for debate. [Energy ETFs Still Have Firm Dividends]

With Freeport, only three S&P 500 members have cut dividends this year. The other two are oil services firms Ensco (ESV) and Diamond Offshore (DO). Those stocks are down an average of 29% this year.

If Exxon and Chevron do not raise their dividends this year, the stocks will be expelled from several large dividend ETFs that use payout increase as part of the funds’ stock selection criteria. For example, NOBL has over $700 million in assets under management.

Exxon and Chevron combine for nearly 7% of the $356 million PowerShares Dividend Achievers Portfolio (PFM) , an ETF that requires dividend increase streaks of at least 10 years. Like PFM, the Vanguard Dividend Appreciation ETF (VIG) , the largest U.S. dividend ETF with $21.2 billion in assets as of the end of February, requires 10-year dividend increase streaks for admission. Exxon was VIG’s seventh-largest holding at a weight of 3.3% as of Feb. 28. [Different Dividend ETF Strategies]

ProShares S&P 500 Aristocrats ETF