How AT&T's Dividend Cut Will Impact These 5 Dividend Growth ETFs

A few ETFs have significant positions in AT&T and could see a meaningful change once the stock is removed.
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It looks like the long-held fear from many dividend investors holding AT&T (T) stock is about to come true. While the current dividend yield of 6.5% is very attractive on the surface, there were concerns that the company's huge debt load, roughly $170 billion currently, would become a burden and management would be forced to make a dividend reduction is order to save cash.

The debt load remains a concern, but it looks like the company is going to use the merger of assets with Discovery (DISCA) as the catalyst to finally reduce the quarterly dividend. The merger should serve to lighten the load somewhat - AT&T is expected to receive about $43 billion in cash equivalents in the deal - but the executive team's comments that the dividend will be "resized to account for the distribution of WarnerMedia to AT&T shareholders" and that the company "expects an annual dividend payout ratio of 40% to 43%" sure seems to be the writing on the wall. If you do the math, that would translate to a quarterly dividend reduction by roughly 25-35% most likely.

That, of course, is bad news for investors using AT&T as a core holding in their dividend portfolios. AT&T's huge yield in a world where equity yields of 2-3% are becoming harder to come by, it looks like one of the cash cows is going away (although a 4% yield on the heels of a merger that looks positive in most regards still isn't a bad deal).

This will also impact dividend ETF holders as well, although not nearly to the same degree as direct stockholders of the company. Once the dividend cut occurs, ETFs that require any kind of history of consecutive annual dividend growth will need to kick AT&T out of the fund. In some cases, these are ETFs with several billions in assets. In other cases, funds with AT&T among their top 10 holdings will need to liquidate those positions. We could end up seeing some big changes within some well-known dividend growth ETFs.

Here are five ETFs that are expected to have a significant impact.

First Trust Morningstar Dividend Leaders ETF (FDL)

AT&T is the single largest holding in FDL with a whopping 10% allocation. Outside of pure telecom industry focused ETFs, no fund currently has more exposure to AT&T than FDL. With AT&T removed, fellow telecom Verizon will become the fund's top holding.

Even though the fund is fairly top-heavy (the top 5 holdings account for 40% of the fund), FDL is already fairly diversified from an industry standpoint. Six different sectors have weightings of between 13% and 20%, so that will certainly soften the blow, although we may see a tiny tick down in the fund's 3.8% yield.

Invesco High Yield Equity Dividend Achievers ETF (PEY)

PEY is another fund that targets companies with both a dividend growth history and a high yield. The fund only requires a minimum 10-year growth history, so it will include a lot more of the newer dividend contenders as opposed to just the more mature dividend payers.

AT&T is the third largest component in this fund, although at a much more modest 3% of holdings. PEY also offers a 3.8% yield right now, so it will still be a very nice high yield option for most.

SPDR S&P Dividend ETF (SDY)

If you haven't noticed the trend already, AT&T is very popular among ETFs that consider both dividend growth history and dividend yield. SDY is yet another fund that targets these two areas. It has the largest pure position in the stock of the dividend growth ETFs at roughly $550 million.

AT&T is SDY's 2nd largest holding right now, but it will impact the fund's overall communication sector exposure. The fund has about 5% of assets in this group of which AT&T accounts for more than half. Following AT&T's removal, SDY's comparatively minor exposure will become almost non-existent.

iShares Select Dividend ETF (DVY)

DVY only requires a 5-year dividend growth streak, so in practice it's really more of a pure high yield ETF. Despite that, AT&T is still the fund's third largest holding at around 2.2%, so it's removal will have a modest impact on the portfolio.

With other high yield names, including Oneok, Altria, Philip Morris and ExxonMobil residing in the top 10 holdings, taking AT&T out of the portfolio might have the least effect in DVY of any of the other dividend ETFs on this list.

ProShares S&P 500 Dividend Aristocrats ETF (NOBL)

This is the ETF most synonymous with long-term dividend growth as companies must have 25 straight years of rising dividends to earn the aristocrat title.

AT&T may be one of the bigger name stocks in this portfolio, but taking it out will only have a pretty minor impact. That's because NOBL equal weights the 65 components currently in the fund. The median holding only accounts for about 1.5% of assets, which is where AT&T is right now. Saying that AT&T is no longer a dividend aristocrat will probably be more noticeable than any material impact you'll see in this fund.