2

Every month I invest a percentage of my income in three ETF's. Two provide distributions and income to me every three months. My thoughts are:

  • The distributions come from dividends from the companies in the ETF

  • Companies paying dividends usually have a solid business plan which allows them to do so even during recessions

  • These ETFs are MSCI EM, Euro Stoxx 600 and they contain mainly large-cap companies

  • The distributions should continue during a crisis

What will happen to these distributions if a financial crisis occurs?

2

ETF pays dividend from the dividends of its holdings. As an ETF has multiple holdings and thoss holdings pay dividends on different dates, so the ETF already has the money to be paid. Therefore there should be no affect.

1

Companies paying dividends usually have a solid business plan which allows them to do so even during recessions

This will be company-dependent. Some companies may experience a cash crunch where it is in their best interest to suspend dividends.

Therefore the distributions will continue during a crisis

What I would be more worried about in a crash is the value of the ETFs. Your dividends may go down, but the yield (as a percentage of the value) may actually increase because the value of the ETFs will (presumably) drop.

As an example, look at VIG in the second half of 2008. The fund paid three quarterly dividends - 0.281 before the September market crash, and 0.268 and 0.257 afterwards. Yet the value of the fund dropped by almost 25% even accounting for the dividends. So your income was relatively stable but your growth potential was significantly reduced.

Also note that dividends from an ETF are offset by a drop in value of the ETF, so from a wealth standpoint, it is a wash. It's mechanically the same as if you owned an ETF that paid no dividends and sold, say, 2% of your balance every quarter.

If you want low-risk investments with more stable income, then you might look at fixed income ETFs. They will be less susceptible to drops during a crash, but also won't grow as much in bull markets.

  • It's either income as stated in paragraph #2 or it's not as stated in paragraph #3 ("from a wealth standpoint, it is a wash"). I go with paragraph #3. You? Perhaps Yield is a better descriptor? – Bob Baerker Sep 21 '18 at 15:49
  • @BobBaerker I'm not sure what you're referring to. By "income" I mean dividends only (and/or distributed capital gains). By "wealth" I mean value plus dividends (which should be the same all else being equal). – D Stanley Sep 21 '18 at 15:52
  • Two points. 1) My take is that if selling 2% of your position quarterly, you are describing dividend harvesting. I believe that you'd agree that's a withdrawal. If the dividend paying ETF yields 2% quarterly, if you do not reinvest it in the same position, it is also a withdrawal. In both cases, the principal remaining has been reduced by 2%. 2) If "dividends from an ETF are offset by a drop in value of the ETF" and that's a wash, then there isn't any "income" because wealth (aka Total Return) did not change because of the dividend/distribution. It's only taxed as income if non sheltered. – Bob Baerker Sep 21 '18 at 16:05
  • @BobBaerker I think we're splitting hairs here. Again, by "income" I mean distributions only (in the sense of "income investing"), not "increase in wealth", as that is what I believe the OP means by "income". The point of the answer is that "income" (distributions) might be somewhat stable in a crisis, but it comes at the expense of a loss in net total wealth if it comes from equity funds. – D Stanley Sep 21 '18 at 16:09
  • Here's where we disagree. I don't think the OP means as you suggest. His first two sentences indicate that he is regularly investing his income into three ETFs, two of which provide him with income. Since he made no distinction, my guess is that he is conflating income with Yield. AFAIC, it's a mistake for the investment community to consider dividends as income since share price is reduced by the stock exchanges on the ex-div date. It's only income once share price recovers. I suspect that he doesn't know that. – Bob Baerker Sep 21 '18 at 17:50
0

Financially healthy companies usually maintain their dividend payout during a recession, especially large cap stocks. If earnings weaken sufficiently during a recession and that affects the company's ability to pay down debt, the dividend may be cut.

An extreme example would be XLF (Financial Sector SPDR). It paid a quarterly dividend of 26 cents at the end of 2007 and 9 cuts later it (mid 2010) it reached a low of 3 cents per quarter. Any ETF that owns stocks that have reduced the dividend will pay out less, crisis or no crisis.

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