BMO's Dividend Cut: A Prudent Shift or a Warning Sign?

The BMO US Dividend Growth ETF (ZDY.TO) made headlines in March 2025 when it slashed its monthly distribution by 12.5%, reducing the payout from CAD 0.08 to CAD 0.07 per unit. The move, the first reduction since late 2024, has left income investors grappling with a critical question: Is this a temporary adjustment to preserve long-term sustainability, or does it signal deeper vulnerabilities in the ETF's underlying portfolio? To parse this, we must dissect the interplay between U.S. dividend trends, currency hedging dynamics, and the ETF's risk management framework.

The Cut in Context: A Break from Stability

ZDY.TO's March 2025 cut ended a five-month streak of consistent CAD 0.08 distributions, marking a clear inflection point. The ETF, which tracks a yield-weighted portfolio of U.S. dividend-paying stocks, saw its yield drop to 2.12% by mid-April , down from over 2.5% in early 2024. Crucially, the cut was mirrored in the USD-denominated version (ZDY.U.TO), which trimmed its payout to USD 0.05—equivalent to CAD 0.07 at prevailing exchange rates. This alignment suggests the reduction stems from the underlying portfolio's performance, not currency fluctuations.

The Sustainability Debate: Structural Weakness or Prudent Risk Management?

Proponents of the cut argue it reflects BMO's conservative approach to managing payouts. The ETF's disclaimer—that distributions are non-guaranteed and tied to market conditions—has always been a caveat for investors. Yet skeptics wonder: Why now?

The answer lies in U.S. dividend trends. Many companies in sectors like energy and industrials have slowed dividend growth in 2025 amid rising borrowing costs and economic uncertainty. For instance, show a deceleration from peak 2023 rates of 8% to just 3% in Q1 2025. If this trend persists, ZDY.TO's portfolio could face further pressure to pare distributions.

Meanwhile, currency hedging adds another layer of complexity. As a CAD-denominated ETF, ZDY.TO's returns are exposed to fluctuations in the CAD/USD exchange rate. A strengthening Canadian dollar (CAD) would reduce the value of U.S. dividends converted back to CAD—a risk investors must monitor. reveal a 5% volatility range over the past year, which could amplify or dampen returns depending on timing.

NAV Stability: The Ultimate Litmus Test

Investors should prioritize tracking the ETF's net asset value (NAV). A falling NAV would indicate that the underlying stocks are underperforming, signaling that dividend cuts might be inevitable. Conversely, a stable NAV with shrinking distributions could suggest BMO is being overly cautious.

As of April 2025, ZDY.TO's NAV has held steady at CAD 41.35, but this masks sector-specific pressures. For instance, energy stocks—once a dividend stalwart—have seen payouts trimmed as oil prices waver. Investors must scrutinize the ETF's holdings for exposure to sectors prone to dividend cuts, such as financials or utilities, which often face regulatory or rate-sensitive headwinds.

Tax and Structural Considerations

Canadian investors must also factor in foreign tax credits and withholding taxes on U.S. dividends, which can eat into net returns. Additionally, ZDY.TO's biannual rebalancing—set for July 2025—offers a chance to reassess its portfolio composition. If the ETF shifts toward higher-yielding, less volatile sectors, it could stabilize payouts.

The Bottom Line: Monitor, but Don't Panic—Yet

The dividend cut is a cautionary signal, but it doesn't mark an existential threat to ZDY.TO. The ETF remains a valid income tool for investors willing to tolerate volatility, provided they stay vigilant on three metrics:
1. U.S. dividend trends: Are companies in the ETF's top holdings raising or cutting payouts?
2. NAV stability: Is the portfolio's value holding up amid broader market shifts?
3. Currency exposure: How does CAD/USD movement affect returns?

For now, the May 2025 distribution held at CAD 0.07, suggesting BMO isn't panicking. But if the payout drops further—or NAV weakens—the ETF may require a closer look. Income investors should use this as a reminder: dividend sustainability is a marathon, not a sprint. Stay informed, rebalance if necessary, and avoid complacency.