A Gloomy Forecast For Energy ETF Dividends

The Energy Select Sector SPDR (ETF) XLE is down 10.7 percent year-to-date, which is obviously a poor showing, but in a sign of just how poorly stocks are performing this year, XLE is not the worst of the nine established sector SPDR ETFs.

XLE is tied for third-worst with the Materials Select Sector SPDR XLB.

While sector exchange-traded funds are performing worse than XLE, energy ETFs do face dividend issues, and those issues are not pleasant. Last year, when the energy sector was the worst performing group in the S&P 500, energy stocks accounted for the bulk of the negative dividend actions in the benchmark U.S. equity index.

The energy dividend situation is off to an ominous start in 2016. The year is less than two months old and already the sector's dividend cuts and suspensions number in the dozens. Energy companies are displaying a preference for conserving cash and avoiding credit downgrades as oil prices continue tumbling.

Related Link: Energy ETFs Making Noise To Start 2016

Pinching Dividends

“The dismal picture is now starting to filter through to dividend policies with Markit Dividend Forecasting expecting global dividends from large oil & gas companies (above $10 billion in market cap) to decline by 9 percent to $147 billion in 2016. This adds to last year’s decline which means that dividends in 2016 are forecasted to be 22 percent off their 2014 peak,” said Markit in a recent note.

ConocoPhillips COP, a top 10 holding in XLE, pared its dividend earlier this year. Anadarko Petroleum Corporation APC, another XLE holding, recently followed suit. Last year, Chevron Corporation CVX, the second-largest U.S. oil company, let a lengthy dividend increase streak lapse. By some estimates, Exxon Mobil Corporation XOM's payout ratio could reach 100 percent this year if the largest U.S. oil company does not pare its payout. Dow components Exxon and Chevron are XLE's two largest holdings.

Other ETFs could be pinched by falling energy dividends, including the iShares MSCI United Kingdom ETF (iShares Trust EWU). Due to expected cuts in the energy and materials sectors, payouts among FTSE 100 companies are expected to fall this year though BP plc (ADR) BP and Royal Dutch Shell plc (ADR) (NYSE: RDS-A), two major EWU holdings, have yet to announce negative dividend action.

“Ratings agencies may play a part in the oil dividend conundrum as maintaining investment grade status has proven to be one of the few 'sacred cows' which oil executives have least been willing to relinquish,” said Markit.