Canadian investors love dividends. Dividend ETFs, not so much.
The average asset level for the dividend exchange-traded funds in the 2024 Globe and Mail ETF Buyer’s Guide is $906-million, compared with an average of $4-billion in the Canadian equity category. The biggest Canadian dividend ETF in the guide has $2.5-billion in assets, while four Canadian equity ETFs hold approximately $6-billion or more.
Dividend ETFs make a ton of sense in a theoretical sort of way, particularly in today’s market. Several widely held Canadian blue-chip dividend payers have been utter dogs lately. With a dividend ETF, your exposure to these stocks is minimized through diversification.
The same applies to sectors. Utilities and telecoms are classic dividend sectors that have struggled lately. A dividend ETF will have some exposure to these sectors, but also to the better-performing energy and financial sectors.
A theory on the lagging popularity of dividend ETFs: too much overpromising and underdelivering.
The construction of dividend ETFs varies somewhat, but there is almost always some degree of emphasis on dividend growth. But this growth refers more to the stocks in the portfolio than to the distributions of dividend income that investors receive.
If you check out the distribution history of a dividend ETF, you’ll see how this plays out. Monthly distributions can be stagnant for extended periods, even as stocks in the portfolio raise their dividends. In other cases, monthly payouts may rise and then ease back down again.
Long-term growth in dividend ETF distributions is not uncommon, but it’s quite a bit different than owning individual stocks. With a stock, you can see more cash coming into your investment account after a company increases its dividend. With a dividend ETF, you rely on the managers of the fund to fix the amount of dividends distributed to investors each month.
This is a complicated job – dividends flow into the fund in a lumpy way because companies all have different schedules for dividend payments to shareholders. Also, stocks enter and exit the portfolio as part of regular rebalancings. This can also affect the amount of monthly dividend distributions.
The result is a sense of randomness to payouts from a dividend ETF. You can read about stocks in the fund’s portfolio increasing their dividends and not see any near-term changes in the amount paid out to unitholders. There’s none of that sense of satisfaction you get when a company whose shares you own announces it will pay a higher dividend going forward.
One more thought on the popularity of dividend ETFs is fee-related. Canadian dividend ETFs in the buyer’s guide have an average management expense ratio of 0.36 per cent, compared with 0.18 per cent for Canadian equity ETFs. Some fee competition in the dividend ETF category would be helpful.
Editor’s note: This article has been updated to clarify that Canadian dividend ETFs in the buyer's guide have an average management expense ratio of 0.36 per cent, compared with 0.18 per cent for Canadian equity ETFs.
Rob Carrick