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John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.
Interested in dividend investing, but don't have the time or inclination to manage a portfolio of individual stocks?
No problem. Thanks to exchange-traded funds (ETFs), you can enjoy all the fruits of dividend investing without the hassles.
The good news is that the number of dividend ETFs is growing. The bad news? With an increasing number of options to choose from, there's more homework involved in selecting the ETF that's right for you.
ETFs have several advantages. They provide diversification. They have low costs. And they can be bought and sold throughout the day just like stocks. But all ETFs are not created equal, as our Canadian dividend ETF survey reveals.
Can't decide on a particular ETF from the list? There's no reason you can't mix and match. Just remember that ETFs – like stocks – can drop in value. So use ETFs as part of a well-balanced portfolio, with equity and fixed-income weightings that are appropriate for your age and risk tolerance.
iShares Dow Jones Canada Select Dividend Index Fund
- XDV-TSX
- Yield: 4.2 per cent*
- Holdings: 30
XDV is the biggest – and oldest – dividend ETF in Canada. The management expense ratio (MER) of 0.55 per cent isn't the lowest on the block, but it's still cheap compared with dividend mutual funds that charge three or four times as much. One concern: Financials account for 51 per cent of the fund, which is a hefty concentration for one sector. For the three years ended March 31, the annualized total return, including reinvested dividends, was 7.9 per cent, beating the 4.5-per-cent total return of the S&P/TSX composite index.
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iShares S&P/TSX CDN Dividend Aristocrats Index Fund
- CDZ-TSX
- Yield: 3.2 per cent
- Holdings: 62
CDZ used to allow only stocks whose dividends had risen for at least five consecutive years, but that bar was too high for many companies, including the chartered banks. So, in 2011, the rules were relaxed to allow up to two years of flat dividends. CDZ is more diversified than XDV – financials account for just 20 per cent – but the yield is lower and the MER, at 0.67 per cent, is higher. The three-year annualized return of 10.1 per cent is impressive.
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- ZDV-TSX
- Yield: 4.4 per cent
- Holdings: 51
ZDV's MER of 0.4 per cent is attractive, and the yield is the highest of the bunch (keep in mind, however, that higher yields don't always mean higher returns). Unlike XDV and CDZ, both of which track indexes, ZDV uses a "rules-based methodology that considers the three-year dividend growth rate, yield and payout ratio." Financials and energy account for about 60 per cent of the assets. The annualized return since inception in October, 2011, has been about 10 per cent.
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Vanguard FTSE CDN High Dividend Yield Index ETF
- VDY-TSX
- Yield: n/a
- Holdings: 81
VDY was launched in November, so there's no 12-month yield or one-year performance data yet. The MER of 0.34 per cent is a plus, but diversification is a problem: Financials alone account for 60 per cent of the fund, followed by energy, at 27 per cent.
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First Asset Morningstar Canada Dividend Target 30 Index ETF
- DXM-TSX
- Yield: 3.5 per cent
- Holdings: 30
Launched in February, 2012, DXM uses several screens – including dividend yield, five-year earnings per share growth, return on equity and cash flow to debt ratio – to choose companies with high, sustainable dividends. Diversification is good, with financials at 27 per cent, energy at 23 per cent and utilities, consumer discretionary and telecom stocks accounting for about 10 per cent each. The MER of about 0.64 per cent is on the high side, but the rigorous selection methodology is a potential plus.
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Horizons Active Cdn Dividend ETF
- HAL-TSX
- Yield: 3 per cent
- Holdings: 50
HAL is the only Canadian dividend ETF run by an active manager, so the MER is higher, at 0.99 per cent. Since inception in February, 2010, the fund's annualized total return – including reinvested dividends – has been a solid 9.4 per cent. With this fund, it's all about the manager's performance.
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PowerShares Cdn Dividend Index ETF
- PDC-TSX
- Yield: 3.6 per cent
- Holdings: 45
PDC's 65-per-cent weighting to financials is extreme, but it's inflated by the presence of real estate investment trusts and corporations, which account for about nine percentage points. Since inception in June, 2011, the ETF has returned 9.2 per cent annualized, including dividends. The MER is 0.54 per cent.
*All yields are based on trailing 12-month dividends.
Source: Bloomberg
John Heinzl