Troubling News For UK ETFs

Due to “Brexit” fears, or the potential departure of Great Britain from the European Union and the expected subsequent punishment of sterling should that scenario materialize, UK stocks and the relevant exchange-traded funds listed in New York are struggling this year.

For example, the $2.1 billion iShares MSCI United Kingdom ETF (iShares Trust EWU), the largest UK ETF trading the United States, is lower by almost 10 percent year to date. For UK stocks and ETFs, there is more to worry about than Brexit possibilities.

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Discussing Dividends

With energy and materials names looking like the most egregious offenders, the FTSE 100, the UK's benchmark equity index, could see some painful dividend cuts in the coming months. As the Economist reports, the FTSE 100 sports a trailing 12-month dividend yield of 4.2 percent, more than double the comparable yield on the S&P 500. EWU's trailing 12-month dividend yield is even higher at 4.37 percent.

The Economist pointed out that a dividend cover ratio of two is deemed comfortable in the UK, but the FTSE 100's dividend cover ratio is currently inching closer to one – its lowest level this century.

Put “BHP Billiton dividend cut” into your search engine of choice and plenty of results with 2016 dates on them rapidly appear. There is also speculation that BHP Billiton Limited (ADR) BHP-rival Rio Tinto plc (ADR) RIO and Rolls-Royce Holding PLC (ADR) RYCEY will also reduce payouts. Those stocks combine for 3.1 percent of EWU's weight.

Energy Here And Abroad

The energy sector represents 13.5 percent of EWU's weight and that could prove problematic. Although it is not an apples-to-apples comparison, the energy sector delivered most of the negative dividend action seen in the S&P 500 last year, and that theme is continuing this year.

ConocoPhillips COP said it will cut its dividend, while Chevron Corporation CVX let a lengthy dividend increase streak lapse last year. There is also talk Exxon Mobil Corporation XOM's payout ratio could reach 100 percent this year.

EWU's Lineup

Those are U.S. oil companies, so they are not part of EWU's lineup. Royal Dutch Shell plc (ADR) (NYSE: RDS-A) and BP plc (ADR) BP do combine for 10.4 percent of EWU's weight. Although those British oil giants have not announced dividend cuts, 2016 is still young.

Talk of dividend cuts in the UK represents a stunning reversal from what global dividend investors have grown accustomed to with that market. Put simply, the UK has been the best ex-U.S. dividend growth destination in the world for several years. In 2014, UK dividends climbed 31 percent to $135 billion, according to Henderson Global Investors.