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Portfolio Strategy

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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?

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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.



Read more about dividends:

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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.

Of the three ETFs considered here, CDZ is also the one to most overtly stress the inclusion of dividend growth stocks. Thus the portfolio does not include Manitoba Telecom Services, which recently cut a dividend that hadn't been increased since 2004.

The appeal of MTS was a dividend yield that has ranged from 7 to 9 per cent in the past year or two. XDV's underlying index bit on this stock to the extent that it was the seventh-largest holding at mid-month. HAL does not own Manitoba Telecom.





Investor Education: ETFs

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One of the highest-yielding dividend growth stocks listed on the TSX is BCE Inc., which you won't find in XDV or CDZ. BCE may not have a long record of consistent dividend increases, but it yields about 5.7 per cent and has far outperformed the market this year. The fact that HAL holds this stock shows some benefit to the fact that the fund is actively managed and not a passive mirror of an index.

Sector weightings are another important point of comparison between these three dividend ETFs. Financials make up 60 per cent of XDV, which is a huge amount when you consider how prevalent financials are in other sorts of ETFs, mutual funds and individual stock portfolios. The next largest sectors are traditional dividend territory - telecommunications and utilities.

Banks haven't raised dividends in the past couple of years, so CDZ's exposure to financials is much lower at 34.7 per cent. HAL's manager has made it a point to limit the influence of financials, which have a portfolio weight of 17 per cent.

Curious to know what your fellow investors think of these ETFs? Then check the asset levels and daily trading volumes. XDV is the leader on both counts, but CDZ has clearly gained a following. HAL, a newcomer and a non-traditional one at that, has yet to register with investors if its trading volumes are any indication.

Your needs as an investor will dictate which ETF is best for you, but CDZ stands out here as an ideal choice for the masses. The fees are okay, the yield is attractive, the emphasis on dividend growth makes good sense and there's a decent level of diversification. As an alternative to dividend mutual funds or individual dividend stocks, it's certainly worth a look.

______

BLOGGER'S CHOICE

Three financial bloggers were asked for their views on the best Canadian-market dividend ETF. Here are their replies:

Canadian Capitalist: The Claymore S&P/TSX Canadian Dividend ETF (CDZ) is the choice of Ram Balakrishnan, the writer of this blog. He likes its high level of diversification and doesn't mind the fact that fees are slightly higher than the competing iShares Dow Jones Canada Select Dividend ETF (XDV).

Canadian Couch Potato: The writer of this blog on index investing, Dan Bortolotti, chose a mix of CDZ and XDV. He said he likes the index tracked by CDZ because it's based on proven performance, but not the fact that it currently excludes the banks. "By buying both of these ETFs, you'd get the broad exposure of CDZ, plus a healthy allocation to the banks, which are staples of dividend investing."

Million Dollar Journey: Another win for the Claymore fund. "I am a big believer in the dividend growth investment strategy, which CDZ uses," said the author of this blog, who goes by the alias FrugalTrader.

Rob Carrick

Dividend ETF smackdown

Here are the details on three TSX-listed exchange-traded funds that hold Canadian dividend stocks:

Fund

Ticker

Mgmt

Est. After-Fee

Assets

Top Three

Number

YTD

12-Month

3-Year

Fee (%)

Index/Portfolio

($ mill)

Sectors (%)

of

Return

Return

Return

Yield (%)

Stocks

(%)

(%)

(%)

Horizons AlphaPro Dividend ETF

HAL

0.7

2

10.3

Energy - 28

Cash - 10.2

Consumer - 9.3

27

n/a

n/a

n/a

Claymore S&P/TSX Canadian Dividend ETF

CDZ

0.6

4.7

299.4

Fin. - 34.7

Energy - 21.3

Utilities - 9.6

56

0.1

13.1

-12.2

iShares Dow Jones Cda Select Dividend Index Fund

XDV

0.5

3.7

640.4

Fin.- 60

Telecom - 12.3

Utilities - 10.8

30

-1.3

7.1

-16.4

Notes: HAL was launched in February, so it lacks much of a performance history; its energy weighting includes pipeline stocks, which are like utilities. After-fee index/portfolio yield refers to an estimate of the yield of the stocks in the portfolio minus fees paid by unitholders. Returns are to Aug. 18

Source: Globeinvestor.com, ETF company data

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