Choosing from among the three Canadian-market dividend ETFs traded on the Toronto Stock Exchange is faster, easier and safer than picking individual dividend stocks.
But don't get the idea that any dividend-focused, exchange-traded fund will do. Each of the three choices has unique characteristics that make them good for some portfolios and not so good for others. Ready to dig down into the three to find out which is right for you?
Before we get going, let's review the strategy of seeking dividends through ETFs rather than individual stocks or mutual funds. Two of the dividend ETFs we're looking at here track indexes that are constructed to represent the best of this country's dividend-paying corporations, while the third is run by an experienced manager who selects what he considers to be the best stocks.
Whichever you choose, you'll benefit from a owning a diversified package of stocks that pays out dividend income monthly or quarterly. The risk of making bad stock choices is much reduced when you own a dividend ETF, and so is the need to keep on top of how individual companies are doing.
You get two additional benefits with these ETFs as well, the first being low cost. You'll pay less to own any of them than virtually all mutual funds. Second, you can buy and sell these funds whenever you like during market hours. Dividend ETFs aren't for active trading, but it's nice to be able to place a trade when market conditions are hospitable and not have to settle for end-of-day prices, like you do with mutual funds.
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The three dividend ETF contenders are:
Horizons AlphaPro Dividend ETF (HAL-TSX): An actively managed ETF, which is basically a mutual fund run by a manager that trades like a stock. HAL's manager is Lyle Stein, chief executive officer of the venerable investment firm Leon Frazer & Associates. North American stocks with above-average dividend yields are targeted here, and the mission is to provide regular dividend income plus modest long-term capital gains. Up to 10 per cent of the portfolio is to be held in bonds and preferred shares.
Claymore S&P/TSX Canadian Dividend ETF (CDZ-TSX): A traditional index-tracking ETF, this fund replicates the S&P/TSX Canadian Dividend Aristocrats Index. There's a strong dividend growth emphasis in this index through a stipulation that companies must have increased dividends for at least five straight years. Adding a bit to the risk level is the fact that index members are weighted by yield (high yields suggest investor concerns), although no stock can account for more than 8 per cent of the whole.
iShares Dow Jones Canada Select Dividend ETF XDV-T (XDV-TSX): The oldest and largest of this trio, XDV consists of 30 of the highest-yielding Canadian stocks that meet criteria related to dividend growth, yield and payout ratio.
We'll start our comparison with the cost of owning these ETFs (Remember that brokerage commissions must be paid to buy and sell ETFs). The low-cost leader here is XDV, with a management fee of 0.5 per cent. CDZ's management fee is 0.6 per cent, while HAL's is 0.7 per cent. Miscellaneous administrative fees plus HST will add to the cost of owning XDV, CDZ and HAL by an estimated 0.2 to 0.3 percentage points.
Fees are vitally important with dividend ETFs because they reduce the flow of dividend income you get from the stocks in the fund. The yield of the dividend aristocrats index tracked by CDZ was 5.4 per cent at mid-week - a rough estimate would peg the yield around 4.7 per cent after all fees.
The median yield for the stocks in the Dow Jones Canadian dividend index tracked by XDV was 4.3 per cent on July 31, or somewhere in the area of 3.7 per cent in real life. The yield, before fees, of the portfolio of stocks held in the AlphaPro ETF was 3.1 per cent at mid-year, which means the net yield would be about 2 per cent.
Some dividend investors emphasize high yields to maximize income, while others prefer lower yielding companies that regularly increase their dividend. You get both with CDZ. The dividend aristocrats index tracked by this index includes some income trusts, which usually have higher yields than dividend stocks. Note that most trusts are converting into dividend-paying corporations, many of which will still pay plus-size yields.