Some Dividend ETFs Could Give GE The Boot

Shares of General Electric Co. GE plunged 7.5 percent on more than quadruple the average daily volume Monday after the Dow component, as was widely expected, unveiled a dividend cut as part of its turnaround effort.

GE's quarterly dividend will be 12 cents a share, down from 24 cents, marking one of the largest dividend cuts among S&P 500 firms since the global financial crisis.

“The dividend allocation will be $4.2 billion for 2018, pushing it from above 100 percent of free cash flow to 60 percent to 70 percent, and the dividend yield from 4.7 percent to 2.3 percent,” reports CNBC. “The yield had been the highest in 30 years not counting the financial crisis.” 

GE's status as a dividend cutter could affect the stock's status in some well-known dividend exchange traded funds.

ETF Impact

GE previously cut its payout during the financial crisis. Although the dividend rebounded, until Monday, in recent years, that prior cut disqualified the stock from ETFs that mandate stocks have a minimum dividend increase streak to be included in the fund. Some of the most popular dividend ETFs have payout increase streak requirements ranging from 10 to 25 years.

For now, it is just speculation, but some dividend ETFs that entered Monday holding GE could dramatically reduce or eliminate GE exposure when those funds undergo their next rebalancing. The $1.66 billion First Trust Morningstar Dividend Leaders Index Fund FDL entered Monday with a 4.6 percent weight to GE, making the stock that ETF's sixth-largest holding.

FDL, which is over 11 years old, tracks the Morningstar Dividend Leaders Index. While that benchmark does not have an explicit dividend increase streak requirement, it does look for high-yield stocks “that have a consistent record of dividend payment and have the ability to sustain their dividend payments,” according to Morningstar. 

FDL rebalances in December.

Other Possibilities

The First Trust Value Line Dividend Index Fund FVD has a small stake in GE (none of the ETF's holdings account for more than 0.65 percent of its weight), but FVD components must meet certain Value Line safety criteria. That could be a sign that GE's days in FVD are numbered.

FVD's underlying index is rebalanced monthly, so investors in the $4 billion ETF should soon know GE's fate in the fund. FDL was unchanged Monday while FVD finished modestly higher.

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