How Will Dividend ETFs Fare?
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The passed U.S. legislation to aid companies struggling from the impact of coronavirus would bar companies that borrowed from the U.S. government from buying back stock or paying dividends to shareholders until at least one year after paying the loan back.
While this is a taxpayer-friendly approach to provide support to businesses in need, it is also a reminder for investors to look inside their dividend fund to understand what they have exposure to.
In a multisector thematic research article titled “Covid-19 Impact on Selected Sub-Industries,” which can be found on MarketScope Advisor, CFRA equity analysts highlighted which specific groups of companies would see improvement/weakness in demand impacting the earnings picture.
Likely Corporate Victims
For example, hotels, resorts and cruise lines, and restaurants within the consumer discretionary sector, as well as oil and gas equipment and services as well as oil and gas exploration and production within the energy sector have a projected negative impact.
Meanwhile, household products, hypermarkets and super centers in the consumer staples sector, in addition to biotechnology and pharmaceuticals in the health care sector, have a projected positive impact.
Impacted ETFs
The First Trust Value Line Dividend Index Fund (FVD), with $7.5 billion in assets boasts relatively low-cost factors and relatively low-risk analytics due to its performance record and holdings. The fund holds companies that are deemed to have relatively high safety traits, according to index provider ValueLine, and have above-average dividend yields.
FVD recently held a 12% weighting in consumer staples, including Clorox Company and Walmart, and an 8% weighting in health care led by Amgen. The fund held a modest 2% in energy stocks and a 5% stake in consumer discretionary companies, including a position in Starbucks.
(Use our stock finder tool to find an ETF’s allocation to a certain stock.)
Meanwhile, the iShares Core High Dividend ETF (HDV) has $5.4 billion in assets, and earns favorable points for its cost and risk mitigation factors. HDV is constructed based on the dividend yield of constituents that meet the dividend sustainability and related criteria according to index provider Morningstar.
The ETF has a 24% weighting in energy stocks, including a 10% position in Exxon. However, health care (20%) was the second-largest sector, with Pfizer and Merck among its top 10 holdings.
Some large cap dividend-paying companies may choose to take loans from the U.S. government to continue to stay afloat, while others may experience revenue and earnings pressure.
At the same time, stocks in other subindustries may benefit from the current environment. Investors using dividend ETFs are diversified across various industries and sectors, but should understand what these ETFs do and do not own.
All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of the analyst's compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. For more information, please refer to CFRA's Legal Notice at https://www.cfraresearch.com/legal/.
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