Will Variable Dividends Take Over Energy ETFs?

That thesis was challenged last year as the energy was one of the epicenters of negative dividend action. Now, some energy companies are mulling variable dividends, a move that could ebb payout volatility in the sector.

“The companies that are doing this say they will maintain a base dividend that they can fund comfortably, and then pay shareholders an extra dividend when they have enough free cash flow,” reports Avi Salzman for Barron’s. “Devon announced its first variable dividend level last week, paying 19 cents per share on top of its base 11-cent quarterly dividend. On an annualized basis, that would make its total dividend yield over 5%, up from its normal dividend yield of 2%.”

AMLP seeks investment results that correspond generally to the price and yield performance of its underlying index, the Alerian MLP Infrastructure Index. The index is comprised of energy infrastructure MLPs that earn a majority of their cash flow from the transportation, storage, and processing of energy commodities.

MLPs have become very popular in recent years for two reasons: (1) required quarterly distributions provide a steady stream of current income, and (2) because they are partnerships, MLPs avoid corporate income taxes at both the federal and state level as the the tax liability is passed through to the individual partners.

It remains to be seen if variable dividends will permeate the MLP space, but it’s clear this could be a long-lasting trend in the broader energy sector.

According to Barron’s: “Truist analyst Neal Dingmann expects that this trend will continue. I view a variable dividend as a better alternative to common share repurchases seen in prior years.” 

Other funds with exposure to income-generating energy assets include the VanEck Vectors Energy Income ETF (EINC B-) and the Global X MLP ETF (MLPA A+).

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