Seven ETFs For Investors Mourning The Death Of BP’s Dividend

by on June 17, 2010 | ETFs Mentioned:

Almost two months after an offshore explosion sparked one of the worst environmental disasters in U.S. history, the White House has stepped in to ensure that British oil giant BP is held accountable for cleanup efforts and the economic damage done (see Five ETFs To Watch After Obama’s Oval Office Speech). With public outrage towards the oil industry reaching new highs, BP has had little leverage to resist the measures proposed by lawmakers; BP  hastily agreed to set up a $20 billion escrow fund to pay claims and suspend at least three dividends. The company hopes to resume its dividend payments in 2011, but it remains to be seen if that will be a politically or financially viable option.

The suspension of the dividend was a victory for the Obama administration and was cheered by environmentalists who feared that BP would prioritize payments to shareholders over claims to those impacted by the spill. But for pension funds and other investors who had come to rely on a dividend yield as high as 5% in recent years, the development was devastating. “Clearly, income investors are out in the cold; one of their safest bets has come spectacularly unstuck,” writes David Cottle. “So, for fund managers and all, the race will be on to make up any shortfall the loss of BP’s dividend represents before the next dividend distribution period.”

For investors who depend on the yield from their portfolio to deliver operating cash or fund living expenses, beefy dividend payments are in high demand. Among BP’s largest shareholders are U.K. pension funds who have seen their options for stocks paying an attractive current return dwindle. More than 30% of dividend income in the U.K. market now comes from three companies: Vodafone, Royal Dutch Shell, and GlaxoSmithKline. With investors missing out on roughly $7.5 billion in BP dividends over the next three quarters, the search for replacements is on.

As shown by the suspension of BP’s dividend, exposure to a diversified basket of dividend-paying stocks can offer significant benefits to investors. Below, we highlight seven ETFs focusing on companies that offer attractive dividend yields (for more ETF ideas, sign up for our free ETF newsletter):

iShares Dow Jones Select Dividend Index Fund (DVY)

iShares’ DVY is linked to the Dow Jones U.S. Select Dividend Index, a benchmark that screens stocks by dividend per share growth rate, dividend payout percentage rate, and average daily dollar trading volume, with stocks selected based on dividend yield. The fund’s major holdings consist of popular names like McDonald’s and Chevron, but also contains lesser known companies such as Lorillard and the Entergy Corporation. DVY holds only U.S. domiciled companies and currently offers an annual dividend yield around 3.5%.

Vanguard High Dividend Yield ETF (VYM)

This fund tracks the FTSE High Dividend Yield Index, a benchmark consisting of the U.S. stocks with the highest dividend yields (excluding REITs). Among this fund’s major holdings are all well-known mega caps such as Exxon Mobil, Microsoft, and General Electric. VYM also holds only companies based in the U.S.and pays out an annual dividend of about 3.3%.

Vanguard Dividend Appreciation ETF (VIG)

This Vanguard fund differs slightly from VYM; it tracks the Dividend Achievers Select Index, a benchmark designed to measure the performance of U.S. common stocks that have a history of increasing dividends for at least ten consecutive years. The fund excludes any stocks that may have a low potential for increasing dividends, and excludes REITs as well. Because VIG holds only U.S. companies, it is no surprise to see Pepsi, Johnson & Johnson, and Procter & Gamble in its top holdings. The ETF pays out a dividend yield of 2.4%.

PowerShares Dividend Achievers (PFM)

PowerShares takes a slightly different approach to constructing exposure to dividend-paying stocks with PFM. The ETF seeks to replicate the performance of the Broad Dividend Achiever Index. To be included in the underlying index, the company must have increased their annual dividend for ten or more consecutive fiscal years. Major companies that fit this description include AT&T, Wal-Mart, and Coca-Cola, all of which make up the top holdings of PFM. One notable characteristic of this fund is that its top ten holdings make up for nearly 45% of the assets as a whole.

WisdomTree Dividend ex-Financials Fund (DTN)

DTN follows the WisdomTree Dividend ex-Financials index, a benchmark that measures the performance of high dividend-yielding stocks that are outside of the financial sector. Unlike several of the above ETFs, the major holdings consist of lesser known firms such as Qwest Communications International and Altria Group. DTN allocates about half of its assets to large cap companies, with the remainder split between small and mid cap stocks.

PowerShares International Dividend Achievers (PID)

PID tracks the International Dividend Achievers Index, a benchmark designed to identify an international group of ADRs that have increased their annual dividend for five or more consecutive fiscal years. U.K. equities make up about a quarter of PID’s holdings, with Canada, Mexico, and Spain also receiving large weightings. It’s worth noting that BP makes up about 1.5% of PID, a weighting that seems likely to be reallocated at the next rebalancing.

iShares Dow Jones EPAC Select Dividend (IDV)

This ETF also offers international exposure, seeking to replicate the performance of the Dow Jones EPAC Select Dividend Index. This benchmark measures the performance of a selected group of companies that have provided relatively high dividend yields on a consistent basis over time. Not surprisingly, IDV’s largest weightings are to the financials (21.2%), consumer goods (14.5%), and energy (14%) sectors.

Disclosure: No positions at time of writing.