To recap, the terms of the bank recapitalisation that was announced on Monday specified that the new five-year preference shares being subscribed to by the government should be fully repaid before any dividend payments on ordinary shares might resume - thus protecting taxpayers' interests.
As the website of Lloyds TSB (one of the banks being recapitalised) explained after the weekend:
"Under the terms of the preference shares, no dividend can be paid on ordinary shares whilst any preference shares issued to HM Treasury remain outstanding."
However, by yesterday government representatives were briefing journalists that there was no such rule in place, with a strict ban on ordinary dividends only for a year, and then discretion to restart payments after approval by the Treasury.
Why the U-turn? It looks as though officials were influenced by heavy lobbying pressure from the banks and bank investors, and by a sense of panic as the UK share market fell back to its recent lows, with the share prices of two of the bailed-out banks - HBOS and Lloyds TSB - falling through the government-underwritten issue price.
All in all, a murky story, which has further to run and which does nothing to improve the image of UK policymakers.
But whether ordinary share dividends are to be wiped out for a year or five, the tussle is a reminder of the risks involved in the equity markets. With payouts being cut by many companies - S&P recently reported the worst September for dividends in more than 50 years - investors in dividend-weighted ETFs have had a rude lesson that their income can disappear in the current debt-deflationary environment.
I looked earlier at the one-year returns on two of the largest dividend-weighted ETFs in Europe, the iShares DJ Euro Stoxx Select Dividend 30 ETF (XETRA:EXSG.DE) and the iShares FTSE UK Dividend Plus (LSE:IUKD.L), and compared them against two representative cap-weighted equity ETFs, the iShares DJ Euro Stoxx 50 (XETRA:EXWI.DE) and the iShares FTSE 100 (LSE:ISF.L).
1-year return (to 16/10/08)
iShares DJ Euro Stoxx Select Dividend 30 ETF -53.22%
iShares DJ Euro Stoxx 50 ETF -40.98%
iShares FTSE UK Dividend Plus ETF -49.91%
iShares FTSE 100 ETF -38.49%
This is not a pretty picture for holders of any of the funds, but the dividend-weighted funds have done considerably worse than the cap-weighted ETFs. This of course reflects their heavy weighting in high-yielding financial stocks, many of which have now cut or scrapped their payouts, removing any remaining support from their share prices.
Meanwhile, preference shares are being used more and more frequently for capital injections - by both the US and UK governments in the last week, and by Warren Buffett in his investment into Goldman Sachs on 24 September. With preference shares less volatile than equity, and offering higher yields and greater security because of their superior ranking in companies' capital structure, isn't it time for ETF investors to be given a chance to access this sector of the market?