We put the focus on dividend-paying stocks for this edition of Fund Tracker. We dig into the $4.4 billion BMO Dividend Fund with Lutz Zeitler, Portfolio Manager, BMO Global Asset Management. Zeitler explains what he looks for in a dividend-paying stock and why his fund includes Praxair, Keyera and Brookfield Infrastructure Partners.
The more you mix investment products, the greater the chances you're di-worsifying your portfolio.
Di-worsifying – that's where you're harming your portfolio buy adding variety instead of adding strength through diversification. Let's look at a specific example where someone owns an exchange-traded fund that tracks the S&P/TSX composite index and a Canadian financial sector ETF.
The Canadian market is roughly 34-per-cent weighted to financials, which is the largest sector in the S&P/TSX composite index. You certainly do not need to add a financial sector ETF, and yet it's tempting in light of the sector's 24.6 per cent gain in the past 12 months. That's fourth best among the 10 sectors of the composite index.
In a $100,000 portfolio, a 25 per cent weighting in an ETF tracking the composite index and a 5 per cent weighting in a financial sector ETF gives you a total portfolio weighting of 13.5 per cent to banks, insurers, brokers and other financial companies. That means more than one-tenth of your portfolio is tied the fortunes of a sector with a strong history of wealth creation, but also one with some vulnerabilities if the housing market sinks or consumer loan and mortgage defaults move higher.
Investors could easily end up with still more exposure to financials. For example, an S&P 500 index ETF would have a 16 per cent weighting in the sector. And then there's the possibility that an investor owns some individual bank stocks. A 25 per cent weighting in that S&P 500 ETF plus an additional 3 per cent holding in bank stocks would push the portfolio's overall financial exposure to 20.5 per cent.
We're not done, though. A Canadian corporate bond ETF is bound to have a big weighting in financials as well – let's estimate 35 per cent. If you gave an ETF like this a 10 per cent weighting in your overall portfolio, your financials exposure rises to 24 per cent.
Di-worsifying your portfolio is a particular risk in the Canadian market, which is dominated by a few sectors like financials and energy. If you own a broad Canadian equity market ETF or mutual fund, you should try to avoid these sectors in your other holdings. Double dipping can mean double trouble.
Rob Carrick