Morningstar - Q2 2021 - 25

to accumulate assets over the long term
through funds, the Japanese financial authority
said that a condition to qualify for the
program was that a fund's distribution frequency
could not be monthly.
Many high-paying funds cannot sustain a
steady level of payouts, as the chart of average
distributions broken out by distribution
frequency illustrates. Monthly paying funds differ
clearly from the rest: Each year, distributions
have been smaller than in the previous
one, as the funds have shrunk in size because
of the high payouts. The difference in profile
is notable and should serve as a warning.
There is a constant demand for monthly
distribution funds from retired investors, and
depending on the objective of the investor,
receiving capital in the form of distributions can
be justified. However, our analysis shows
that the costs of monthly dividend funds'
payouts can be considerable, including depletion
of assets, lowering distributions over time,
and poorer total returns compared with other
types of funds.
Although our results might change slightly
depending on the period analyzed, the
overall message is clear: An investor whose
investment objective is to grow assets
over the long term should not depend too
heavily on a fund's level of yield. It is important
to also look into the total amount of money
that the fund generated and how distributions
and price appreciation are balanced.
This study has shown that the typical highpaying fund has shrunk in price through
time, which has in turn reduced distributions
year by year. For an investor looking for
a steady, dependable payout, such a fund is
not a sustainable solution.

TRENDS

Could Investors Have Avoided 2020's
Dividend Disaster?
12-Month
12-Month Organic
Organic
Growth
Growth
Rate
Rate
250
250
End
End
Date
Date0%0%

Fund
Fund
Family
Family

ARK
ARKETF
ETFTrust
Trust
01/31/21
01/31/21
For equity income investors, 2020 was the
Metropolitan
Metropolitan
WestFunds
Funds
04/30/15
04/30/15
2008
. The economic downturn
worst year West
since
took
a
heavy
toll
on
many
dividend-rich,
Janus
JanusHenderson
Henderson
07/31/00
07/31/00
value-leaning sectors, such as energy. Oil and
SPDR
SPDR
StateStreet
StreetGlobal
GlobalShell
Advisors
Advisors
02/28/09
02/28/09
RDS.A cut
gasState
giant
Royal
Dutch
II.
its dividend
Schwab
Schwab
ETFs
ETFs for the first time since World War
07/31/18
07/31/18
Companies in the real estate, financialPimco
Pimco
06/30/10
06/30/10
services, and consumer cyclical sectors were
IShares
IShares
11/30/17
11/30/17
also hard hit.
American
AmericanFunds
Funds
09/30/04
09/30/04
Morningstar employs several screens to identify
Dodge
Dodge& &Cox
Cox
03/31/15
03/31/15
at-risk payouts in its dividend indexes,
Invesco
Invesco
12/31/00
12/31/00
including our economic moat rating and distance
a quantitative measure of financial
toRowe
default,
T.T.Rowe
Price
Price
08/31/07
08/31/07
health. Companies that scored well on
JPMorgan
JPMorgan
01/31/21
01/31/21
these measures were likelier to maintain their
Vanguard
Vanguard
10/31/17
10/31/17
payouts last year.

500
500

750
750 1000
1000

and Chevron CVX and wide-moat-rated Enbridge
ENB all managed to sustain payouts.
Five wide-moat-rated U.S. stocks did cut
dividends in 2020: Blackbaud BLKB, Boeing BA,
Harley-Davidson HOG, Walt Disney DIS,
and Wells Fargo WFC. However, Morningstar's
distance-to-default metric screened out
three of those: Blackbaud, Boeing, and HarleyDavidson. The metric ranks companies
on likelihood of distress, using option-pricing
theory to evaluate the risk that a company's
assets will fall below the sum of its liabilities.
Overall, distance to default was also an
effective predictor of dividend cuts in 2020.

The predictive power of both of these measures
Dimensional
DimensionalFund
FundAdvisors
Advisors
01/31/18
01/31/18 last year is consistent with longer-term
To earn a narrow or wide moat rating, a company
trends. From 2005 to 2020, in the U.S. and around
Fidelity
FidelityInvestments
Investments
12/31/19
12/31/19
the world, companies with moats and
must possess a structural advantage that
$0B
$0B
100
100
200
200
300
300
400
400
gives it a competitive edge. Companies with
higher distance-to-default
scores were
better
Net
Net
Flows
Flows
economic moats around their businesses
able to sustain their dividends.
were likelier to sustain their dividends across
Dan Lefkovitz is a strategist for Morningstar Indexes.
geographies in 2020. In the troubled energy
sector, narrow-moat companies ExxonMobil XOM

Higher Distance-to-Default Scores Mean Lower
Odds of Dividend Cuts

Economic Moats Help Protect
Dividend Payouts

%%ofofCompanies
CompaniesWith
With
Economic
EconomicMoat
Moat
Wide
Wide Narrow
Narrow None
None
Dividend
DividendCuts
Cuts
6060

DtD
DtDCategory
Category
%%ofofCompanies
CompaniesWith
With
High
High
Low
Low
Medium Very
VeryLow
Low
Dividend
DividendCuts
Cuts
Medium
6060

4040

4040

2020

2020

Hiroaki Sato, CFA, is associate director, manager research
with Ibbotson Associates Japan, a Morningstar company.

00
U.S.
U.S.

Developed
Developed
U.S.
U.S.
ex-ex-

Global
Global
U.S.
U.S.
ex-ex-

Source: Morningstar Indexes. Data from 01/01/2020 -11/30/2020.

00
U.S.
U.S.

Developed
Developed
U.S.
U.S.
ex-ex-

Global
Global
U.S.
U.S.
ex-ex-

Source: Morningstar Indexes. Data from 01/01/2020 -11/30/2020.

25
Morningstar - Q2 2021

Table of Contents for the Digital Edition of Morningstar - Q2 2021
