These two ETFs focus exclusively on companies that have increased their dividends at least once a year over a lengthy period.denphumi/Getty Images/iStockphoto
When you're looking for a dividend stock, a high yield may seem attractive but don't stop there. The key to ongoing growth in a dividend-oriented portfolio is to choose companies with a history of regular increases in their payouts.
I have recommended several such companies in previous columns but some people prefer one-stop shopping. So here are two ETFs that focus exclusively on companies that have increased their dividends at least once a year over a lengthy period.
SPDR S&P Dividend ETF (SDY-NYSE)
Background: This ETF tracks the performance of the S&P high-yield dividend aristocrats index. Only U.S. stocks that have raised their payout for at least 25 straight years qualify for inclusion so it's a pretty high-powered club. Some of the names in the top holdings will be familiar such as AT&T Inc., IBM, Caterpillar Inc., and Chevron Corp. Others are less well known, like HCP Inc., AbbVie Inc., and People's United Financial Inc. In total, the fund holds 110 positions. The ETF is operated by State Street Global Markets.
Fund performance: This ETF has performed well in recent years. Over the year to Sept. 30, it gained 24 per cent. The three-year average annual compound rate of return was 12.4 per cent.
Distributions: The fund pays quarterly distributions, which vary from one period to the next. So far in 2016, these have totalled about $1.46 (U.S.) a unit (March, June, and September). Investors also received a year-end distribution of $3.17 in December, 2015, for a 12-month total of $4.63. At the current price, that would work out to a 12-month yield of 5.6 per cent, however there is no guarantee that distributions over the next year will be at the same rate.
Key metrics: The fund has total assets of $14.2-billion. The expense ratio is 0.35 per cent. The price-to-earnings ratio of the portfolio is 21.14.
Analysis: This ETF represents the elite of U.S. dividend-paying stocks. Any company that has been able to increase its payments for at least 25 years, including through the crash of 2008-09, has achieved something very special. This track record suggests these companies should continue to outperform the broad market going forward.
Outlook: This fund is somewhat interest-sensitive because of the nature of its holdings, so it could experience a small setback if the U.S. Federal Reserve Board raises its target rate in December, as many now expect. However, the long-term outlook continues to be positive.
iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (CDZ-TSX)
Background: This fund invests in Canadian stocks that have increased their dividends for at least five consecutive years and have a market cap of $300-million (Canadian) or more. There are 70 positions in the ETF with the biggest weightings in small to mid-cap companies such as Russel Metals Inc., Gibson Energy Inc., Exchange Income Corp., Northview Apartment REIT, and Corus Entertainment Inc.
Fund performance: This ETF is coming off a decent year, with a gain of 10.2 per cent over the 12 months to Sept. 30. The three-year average annual compound rate of return to that point was a less impressive 6.5 per cent.
Distributions: Payments are made monthly, with the level adjusted every three months. For the June-September period, the monthly distribution was 8.59 cents, which would work out to $1.03 over a full year if maintained. On that basis, the current yield is 4.1 per cent.
Key metrics: The fund has total assets of $948-million. The expense ratio is 0.67 per cent. The portfolio consists of 75 positions. The P/E ratio is 15.16.
Analysis: This is much more of a small/mid-cap portfolio than its U.S. counterpart although if you scroll through the list of holdings you'll find some large companies, including the major banks. Because it invests only in Canadian stocks, there is less diversification than in SDY. On the plus side, Canadian company dividends qualify for the dividend tax credit.
Outlook: This fund should continue to generate decent cash flow but will likely continue to underperform SDY on a total return basis.
Ask your financial adviser if either of these ETFs is suitable for your portfolio.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca.
Gordon Pape