Dividend funds for investors who are banked to the max

Canada's banks are dividend machines, so it makes sense that dividend funds and ETFs are loaded with them.

But if you've got a lot of bank exposure elsewhere in your portfolio, your dividend fund could put you at risk of bank overload. You don't want potential trouble in one sector to infect everything in your portfolio. Yet this could happen if you owned a broad-based equity mutual fund or exchange-trade fund, and had holdings in preferred shares and corporate bonds. Banks dominate all these categories.

To prevent your dividend fund from overexposing your portfolio to bank stocks, consider one of the few that are underweighting the financials sector. Financials account for 35 per cent of the S&P/TSX composite index. Let's see what we can find if we use the Globeinvestor.com fund screener to find Canadian dividend income funds with no more than 20 per cent of their holdings in financials.

Some of the funds that come up are:

• Manulife Dividend Income Series D: Financials accounted for just less than 17 per cent of the portfolio as of Aug. 31; the management expense ratio is 1.45 per cent for the D version of this fund, which is intended for self-directed investors (the fee is lower than for adviser-sold versions of the fund). The annualized three-year return to Sept. 30 was 10.8 per cent, which compares with 4.5 per cent for the S&P/TSX total return index.
• Cambridge Canadian Dividend Class A: Just less than 13-per-cent exposure to financials; MER of 2.4 per cent and a 10-year return of 9.8 per cent.
• Dynamic Dividend Series A: An 18-per-cent weighting in financials; MER 1.61 per cent, three-year return of 8.2 per cent.
• Horizons Active Canadian Dividend ETF (HAL-TSX): Financials make up a little less than 18 per cent of this dividend ETF; the MER is 0.79 per cent; the three-year return is 5.2 per cent.

In researching funds such as these, check to see exactly how the lower emphasis on financials is playing out in the broader portfolio. You may find a much more even distribution among sectors than you'll see in the S&P/TSX composite index and funds that track it. Manulife Dividend Income has a total of 25 per cent in financials and resource stocks. The index has a two-thirds tilt to those segments of the economy.