Comstock
The tumbling loonie is great news for Canadian exporters. Their products are suddenly much more competitive in global markets, especially in the U.S., and they're taking advantage of the situation. Recent numbers from Statistics Canada showed better than expected GDP growth over the three months to Sept. 30, thanks in part to a healthy rise in exports.
However, if you're among the millions of people who like to get away from the frozen north for a while during the winter, the sagging loonie is not good news. Every drop adds more to the cost of that get-away. What were great Florida bargains a couple of years ago now look pricey.
That's why some investors are looking to securities that provide U.S. dollar cash flow. It's a way to provide a steady income stream that won't be compromised by exchange rate fluctuations. If you're in that group, here are a couple of suggestions.
BMO U.S. Dividend ETF (US dollar units) (ZDY.U)
This is a new exchange-traded fund, launched in March 2013. It invests in a portfolio of American dividend paying stocks that uses a methodology that considers the three-year dividend growth rate, yield and payout ratio. The portfolio is reconstituted every December and rebalanced once a year in June. The units trade on the TSX in U.S. dollars. (There is also a Canadian dollar version of the same fund that trades under the symbol ZDY.)
The portfolio currently contains 101 stocks. Top positions (which may change during the coming month) include Windstream Holdings, Staples, Altria Group, AT&T and Darden Restaurants. The portfolio is well diversified with only one position larger than 2 per cent of assets (Windstream). About 22 per cent of the stocks are in the utilities sector with consumer staples (15.8 per cent) and consumer discretionary (13.1 per cent) the next largest groups.
The ETF currently pays monthly distributions of $0.042 per unit ($0.504 a year). That translates into a yield of 2.65 per cent based on a price of $19.04 (U.S.). The maximum annual management fee is 0.3 per cent.
SPDR S&P Dividend ETF (SDY)
If you'd prefer to invest directly in the U.S., this ETF from State Street Global Advisors is worth considering. Its benchmark is the S&P High Yield Aristocrats Dividend Index, which includes companies that have increased their dividends annually for at least the past 20 years. Some of the top holdings in the portfolio are HCP Inc., AT&T, Consolidated Edison, National Retail Properties, Target Corp., Chevron and McDonald's. The fund holds 98 positions in total.
This fund has a longer track record than ZDY (it was started in November 2005). As of Oct. 31, it was showing a five-year average annual compound rate of return of 16.4 per cent. Distributions are paid quarterly and recently have been running about $0.45 (U.S.). However, the fund may make a large year-end capital gains distribution as it did on Dec. 20, 2013 when it paid out $1.695 per unit.
So a word of warning! Do not, under any circumstances, buy either of these ETFs in a non-registered account until after the record day of the December distributions. If you do so, you'll be taxed on your own money! How is that possible? It's simple, really. Suppose you buy 100 shares of SDY now, investing about $8,100. Then, on Dec. 20, the ETF distributes $2 per share. You'll receive the $200 payment, but the net asset value of the fund will drop to reflect the distribution. By buying so close to the distribution date, you'll basically be getting your own money back in the form of taxable income.
The same principle applies to all mutual funds and ETFs. If you're making the purchase in a non-registered account, hold off until after the December payout.
Gordon Pape