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The good – and bad – of seven Canadian dividend ETFs

John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.

Like the idea of dividend investing, but don't feel comfortable picking individual stocks?

Dividend exchange-traded funds might be just the ticket. They provide instant diversification, are cheaper to own than dividend mutual funds and some – though, as you'll see, not all – dividend ETFs have outperformed Canada's benchmark stock index.

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To help you navigate the increasingly crowded dividend ETF field, today I'll discuss the pros and cons of seven different ETFs. To make the list, the ETF had to have been in existence for at least five years so that I could make an apples-to-apples performance comparison. (In a future column, I'll look at dividend ETFs with shorter track records.) A few notes: Yield is calculated here as the sum of the ETF's trailing 12-month cash distributions divided by the current unit price; five-year annualized returns are for the period ended Feb. 28; and where I mention dividend growth, I am referring only to eligible dividends distributed by the ETF and excluding capital gains and return of capital that may also form part of the distribution.

iShares Canadian Select Dividend Index ETF (XDV)

Assets: $1.55-billion

Inception: Dec. 19, 2005

Yield:3.7 per cent

Mgt. expense ratio (MER): 0.56 per cent

Five-yr. ann. total return: 7.8 per cent

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Holdings: 29

Canada's oldest and largest dividend ETF, XDV employs a "rules-based methodology" that analyzes dividend growth, yield and payout ratio. The ETF's five-year annualized total return beat the S&P/TSX composite index's annual total return of about 7.2 per cent – but just barely. Dividends have grown at a compound annual rate of about 8 per cent from 2010 through 2015, which is good. But diversification is poor: The ETF holds just one utility (Emera) and one pipeline (TransCanada), which together account for just 7 per cent of the fund. That compares with a weighting of 40 per cent for banks. If our beloved banks hit a rough patch, XDV's unitholders will feel the pain.

iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (CDZ)

Assets: $1.03-billion

Inception: Sept. 8, 2006

Yield: 3.8 per cent

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MER: 0.67 per cent

Five-yr. ann. total return: 7.5 per cent

Holdings: 88

CDZ tracks an index of "dividend aristocrats" – companies that have raised their dividends for at least five consecutive years. The ETF's dividend payments rose at a solid annual rate of 14.7 per cent from 2010 through 2015, but that growth – impressive as it is – also reflects the impact of index additions, deletions and rebalancings. One problem with CDZ is that, because the index is weighted according to yield, struggling companies whose shares have plunged – and whose yields have therefore risen sharply – end up being among the most heavily weighted constituents. For example, one of CDZ's top holdings is Corus Entertainment, whose yield of nearly 9 per cent signals heightened risk of a dividend cut. It's happened before: CDZ's top holding was once troubled fund company AGF, which later slashed its dividend and was punted from the index.

BMO Canadian Dividend ETF (ZDV)

Assets: $800.9-million

Inception: Oct. 21, 2011

Yield: 4.1 per cent

MER: 0.39 per cent

Five-yr. ann. total return: 6.3 per cent

Holdings: 51

ZDV uses a rules-based methodology that looks at the three-year dividend growth rate, yield and payout ratio of stocks. The relatively low MER is attractive, and diversification is acceptable, with banks and other financials (35.8 per cent), energy (22.5 per cent) and utilities (14.5 per cent) accounting for less than three-quarters of the portfolio. However, ZDV's dividend income has fallen in recent years – it dropped more than 9 per cent from 2013 through 2015 – as high-yielding energy companies such as Crescent Point Energy and Freehold Royalties slashed their dividends after oil prices plummeted, leading to these stocks being removed from the ETF.

iShares Core S&P/TSX Composite High Dividend Index ETF (XEI)

Assets: $470.9-million

Inception: April 12, 2011

Yield: 4.3 per cent

MER: 0.22 per cent

Five-yr. ann. total return: 6.6 per cent

Holdings: 75

XEI is designed to replicate, before fees, the S&P/TSX Composite High Dividend Index, which is weighted by market cap and is composed of stocks with the highest yields on the S&P/TSX composite index. XEI's low MER is a plus, and diversification is fair, with energy and financials accounting for roughly 31 per cent and 30 per cent, respectively, of the fund's weighting. (Note that energy includes several pipelines such as Enbridge and TransCanada, which are typically more stable than energy producers whose fortunes rise and fall with commodity prices.) Further improving diversification, XEI provides exposure to real estate investment trusts. Dividends have grown at a healthy annual rate of 6.9 per cent from 2012 through 2015.

PowerShares Canadian Dividend Index ETF (PDC)

Assets: $135.7-million

Inception: June 16, 2011

Yield: 3.7 per cent

MER: 0.55 per cent

5-yr. ann. total return: 11.1 per cent

PDC seeks to replicate, before expenses, the performance of the NASDAQ Select Canadian Dividend Index, which consists of companies that have paid rising - or steady - dividends for at least five consecutive years. But instead of weighting stocks by yield, the index uses a modified market cap weighting that limits any one security to 8 per cent of the index at each quarterly rebalancing. PDC's fairly robust weighting in banks (currently about 30 per cent) and the high quality of the telecoms, pipelines, utilities, infrastructure and real estate stocks in the index have helped this ETF post the highest five-year return of the bunch - by a significant margin.

First Asset Morningstar Canada Dividend Target 30 Index ETF (DXM)

Assets: $34.8-million

Inception: Feb. 2, 2012

Yield: 3.8 per cent

MER: 0.67 per cent

Five-yr. ann. total return: 4.1 per cent

Holdings: 30

DXM is designed to track an index that screens for factors including dividend yield, the ratio of cash flow to debt, earnings growth, earnings estimate revisions and return on equity. However, the formula's results have been underwhelming as the ETF trailed the S&P/TSX composite index's total return over the past five-year period. On a positive note, dividends have grown at an annual rate of about 15 per cent since 2012, although – as with other dividend ETFs – turnover of index members may account for some of that increase. Diversification is acceptable, with the largest weightings in energy (29.6 per cent), financials (26.8 per cent), utilities (17.1 per cent) and telecoms (13.8 per cent).

Horizons Active Canadian Dividend ETF (HAL)

Assets: $28.9-million

Inception: Feb. 9, 2010

Yield: 3.1 per cent

MER: 0.79 per cent

Five-yr. ann. total return: 8.9 per cent

Holdings: 60

HAL investors pay a higher MER, but in exchange they get a manager actively picking stocks as opposed to an ETF that passively tracks an index or follows a rigid formula. Judging by HAL's strong performance – its five-year return was the second-highest of the bunch – the human touch paid off. This outperformance reflects, in part, the manager's selection of growth companies – such as CCL Industries and Boyd Group Income Fund – that posted big gains, but whose tiny yields would have kept them out of most dividend ETFs. HAL's diversification is also a strong point, with energy (including pipelines) accounting for 27 per cent and financials just 15 per cent, with utilities, industrials, telecoms, real estate and consumer stocks making up most of the rest.

Yield Hog is part of Globe Unlimited's Strategy Lab series.

Editor's note: This updates an earlier version which did not include the PowerShares Canadian Dividend Index

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About the Author
Investment Reporter and Columnist

John Heinzl has been writing about business and investing since 1990. A native of Hamilton, he earned a master's degree from the University of Western Ontario's Graduate School of Journalism and completed the Canadian Securities Course with honours. More

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