Energy ETFs: No More A Dividend Haven?

by: Zacks Funds

OIL ETF Energy stocks may be the most-cursed securities in the last one-year period, but all was not repulsive in this corner of the investment world. Investors should note that energy stocks are always rich with dividends.

With crude prices having lost more than one-third in the last one-and-a half year and many of the energy stocks falling by the wayside, dividend remained the only attraction and the only point of certainty for the space. So a steady dividend profile used to lure investors toward a stock which was otherwise on a fast-falling mode (read: Short Oil ETFs in Focus as Crude Prices Keep Falling).

However, this lone promise too started to lose its appeal for valid reasons. U.S. crude is now trading at $28 per barrel on supply glut worries. Market watchers had earlier projected that the long-exhausted commodity oil can slip to even $20, which is way below the psychologically resistant level of $40 (read: 4 Country ETFs to Shun if Oil Hits $20).

The latest blow can largely be blamed on that the lifting of the Western ban on Iran. Possibilities of more supplies to the market from Iran along with global growth worries renewed fears in oil investing. The Chinese economy's slowdown story is now known to all. Being one of the largest users of oil, this became a big time worry for the oil industry.

Moreover, OPEC announced that will continue to pump out more oil despite piling-up supplies and falling demand. OPEC terminated the production limit after the December 4 meeting. The OPEC top brass Saudi Arabia and other Gulf countries are more concerned about market share rather than restoring the commodity price.

Dividend Cut on Rise

Needless to say, such a situation is leaving oil companies severely cash-strapped and loss making which in turn is eating up their dividend profile. In December, energy giant Kinder Morgan (NYSE:KMI) planned to cut its quarterly dividend to 12.5 cents from 51 cents. In January, Southcross Energy Partners (NYSE:SXE) suspended its quarterly cash distributions.

Another partnership that cut cash dividend is Atlas Resource Partners (NYSE:ARP). In November, this energy player announced that it would reduce its annual cash distribution from $1.30 to 15 cents per common unit. The Canadian energy company Husky Energy Inc. (OTCPK:HUSKF) also announced that it is shelving fourth-quarter dividend payments and embarking on a stricter spending control regime.

Analysts are expecting a few more energy giants such as BP (NYSE:BP), Conoco Phillips (NYSE:COP) and Chevron (NYSE:CVX) to slash dividends in the coming period. Investors should also note that the analysts at Macquarie projected the big US energy companies, Exxon (NYSE:XOM) and Chevron, to end 2015 with net debt of 1.1 times cash flow and equal to cash flow, respectively. Both indicators underperform their peer group's indicator.

ETF Impact

Below we highlight the latest price-performance of the highest-yielding energy ETFs.

The equity version of the natural gas ETF, the First Trust ISE-Revere Natural Gas Index ETF (FCG), which yields the highest (6.18%) has lost the most (28.7%) so far this year (as of January 19, 2016).

The SPDR S&P International Energy Sector ETF (NYSEARCA:IPW) yielding 5.48% annually has retreated 13.6% in the year-to-date frame.

The Guggenheim Canadian Energy Income ETF (NYSEARCA:ENY) which yields 5.29% annually - the third best in the oil field - has lost 16.3%.

However, there are two energy ETFs - the Energy Select Sector SPDR ETF (NYSEARCA:XLE) and the iShares MSCI Global Energy Producers ETF (NYSEARCA:FILL) - which offer compelling yields but have piled up relatively lesser losses in the year-to-date frame. Both yield 3.76% and have lost 11.8% and 10.2%, respectively.

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