Riskiest ETF Dividend Yields In A Volatile Market

ETF dividends depend on the underlying cash flows of their holdings.
Below, we identify ETFs with seemingly attractive dividend yields, but with holdings that lack the cash flows to sustain the dividends.
These ETFs are most at risk of cutting dividends and dividend yields, especially as economic conditions deteriorate.
ETF dividends depend on the underlying cash flows of their holdings.
Below, we identify ETFs with seemingly attractive dividend yields, but with holdings that lack the cash flows to sustain the dividends. These ETFs are most at risk of cutting dividends and dividend yields, especially as economic conditions deteriorate. Risky dividend ETFs are in the Danger Zone this week.
Not All Dividend Yields Are Created Equal
High-yielding ETFs hold great appeal for some investors. But that appeal disappears if the underlying holdings of an ETF don’t generate the free cash flow needed to pay their promised dividends. Companies that don’t generate sufficient cash flows to sustain standard operations may be forced to reduce or cut dividend payments in an effort to sustain the business.
The more an ETF invests in stocks with risky dividend yields, the riskier the ETF’s own dividend yield becomes. Investors should focus on the core earnings and free cash flow of ETF holdings to assess the reliability of ETF dividend yields.
Here are the criteria we used to identify the ETFs with the riskiest dividend yields:
A negative cumulative five-year FCF less than five-year dividend payments as a percent of enterprise value (FCF Deficit as % of Enterprise Value) Dividend yield greater than 4% A free cash flow yield of 0% or worse over the trailing twelve month period A Neutral-or-worse Risk/Reward rating Figures 1 and 2 show the FCF deficit as a percent of enterprise value, dividend yield, and FCF yield of the five non-real estate investment trust (REIT) ETFs and five REIT ETFs under coverage that meet the above criteria. We separate REIT ETFs... Read more