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An Industry ETF With Surprising Dividend Growth Potential

January 19, 2016 8:25 am
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A quick look across airline stocks shows a slew of paltry yields. Delta Air Lines Inc. (NYSE: DAL) with a trailing 12-month dividend yield of a meager 1.2 percent looks good compared to rivals such as American Airlines Group Inc. (NASDAQ: AAL) and Southwest Airlines Co. (NYSE: LUV), neither of which yields more than one percent.


While airline equities and the U.S. Global Jets ETF (NYSE: JETS) do not appear to be predictable destinations for income investors, that could be starting to change as airlines are generating stout profits and parting with more of their cash in the form of shareholder rewards.


Delta, the largest U.S. carrier by market capitalization, “hiked its quarterly payout last year by 50%, to 13.5 cents, and it’s anticipated to follow a similar course this year. Credit Suisse forecasts the company will pay out 68 cents in 2016, up from 45 cents in 2015,” according to Barron's.


United Continental Holdings Inc. (NYSE: UAL) is the only one of the four major U.S. airlines that currently does not pay a dividend, but the company announced a $3 billion share repurchase program in July. Delta, Southwest, American and United combine for over 40 percent of the portfolio in JETS, the lone dedicated airline ETF.


Though yields on airline stocks are still piddly, the industry as a whole saw its payouts surge nearly 150 percent for the five years ending 2015 and more growth is expected this year.


Markit, a financial-information company, projects that American will boost its quarterly payout this year to 12.5 cents a share, a 25% increase. Southwest, meanwhile, raised its dividend last year by 25%, to 7.5 cents. The airline is expected to raise its payout again this year. Markit forecasts a hike to nine cents a share, a 20% increase,” reports Barron's.


Faltering oil prices are helping boost profits and cash flow for many of the U.S. carriers found in JETS' lineup. Fuel prices are the largest input cost for airlines. However, sagging oil prices are not boosting airlines' share prices. Lower oil prices are simply making shares of airlines less bad than other sectors. JETS is down 6.4 percent over the past six months while the United States Oil Fund (NYSE: USO) is lower by more than 48 percent.


Still, JETS' loss over that period is just a third of the downside incurred by the iShares Transportation Average ETF (NYSE: IYT), an ETF that devotes 23.4 percent of its weight to airline stocks.


Alaska Air Group (NYSE: ALK), another JETS holding, doubled its payout between 2013 and 2015.

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