After a tough month for stocks, many of the large dividend stock funds and ETFs are down on the year.
-- The iShares Select Dividend ETF (DVY) , a $16 billion fund, is down on the year.
-- ProShares S&P 500 Dividend Aristocrats (NOBL) , a $3.4 billion fund focused on the S&P 500 Dividend Aristocrats, has gone nowhere for the year.
-- The Vanguard High Dividend Yield ETF (VYM) , with just over $21 billion in assets, is down this year.
-- The Vanguard Dividend Appreciation Fund (VIG) , tracking the Nasdaq U.S. Dividend Achievers Select Index, a $21 billion fund, is still up on the year, but dropped over 6% in the past month.
The main culprit is that rising rates have negatively impacted dividend stocks as some investors have been able to take less risk as short-term money market yields have increased dramatically. One year ago, you could get just 1.1% from investing in three-month T-Bills, and now that yield is 2.31%. The two-year Treasury yield has climbed to 2.9% from 1.6% in that same time frame.
The rise in rates has affected all stocks, but dividend stock investors need to be particularly careful as some money that has come into the market in the search for yield, could leave as the Fed Chair Jerome Powell seems intent on pushing yields higher and higher.
However, the main reason I am particularly cautious on dividend stocks right now is we may finally be seeing the first signs that companies with large debt balances may be using restraint on their equity repurchase and dividend policies.
-- Anheuser-Bush InBev (BUD) just cut its dividend by 50%. The stock is now down over 30% year to date, but part of that decline occurred in the wake of slashing the dividend. The company is rated A3 on negative watch by Moody's and A- on negative outlook from Standard & Poor's. With almost $100 billion of debt, according to Bloomberg, BUD has to pay careful attention to its credit ratings, and cutting the dividend seems to have been a step in that direction.
-- Comcast Corp. (CMCSA) just issued $27 billion of debt on Oct. 2, and filed an 8-K the day before announcing that the company was going to "...pause its common stock repurchase program in 2019 to accelerate the reduction of indebtedness..."
These are isolated incidents -- so far -- but could be a sign that companies may have to carefully consider dividend policies and stock buyback plans in the wake of rising debt levels and higher interest rates.
This information isn't being talked about much yet. Possibly because I am overreacting, but also, because with so much going on in the markets, few people have had the time to connect the dots.
Where preservation of capital remains a top priority in any dividend portfolio, I think the prudent step is to hold off allocating more money to dividend stocks until a clear bottom is set in the markets and dividend stocks regain some of their former glory.
This article was originally sent Oct. 30 to subscribers of TheStreet's Income Seeker, a product presenting the world of opportunities in fixed income and dividend stocks. Click here to learn more about Income Seeker and to receive articles like this each day from Peter Tchir, Hale Stewart, Chris Versace and others.