The Brexit-driven stock market decline was a quick and dirty test of how investments hold up in stressful times.
Canadian dividend stocks get a D grade on that count, largely because they trailed the broader market. If anyone still has any notions that dividend stocks are safer or less volatile than other stocks, the events of the last week should wise them up.
To gauge how dividend stocks did as a group, let's compare the returns of some dividend exchange-traded funds against broad market ETFs for the week to June 28. We'll start with a pair of Vanguard funds – the Vanguard FTSE Canada All Cap Index ETF (VCN) and the Vanguard FTSE Canadian High Dividend Yield Index ETF (VDY). VCN was down 1.2 per cent over that period, while VDY fell 2.2 per cent.
Now let's look at a trio of BlackRock funds – the iShares Core S&P/TSX Capped Composite Index ETF (XIC), the iShares Canadian Select Dividend Index ETF (XDV) and the iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (CDZ). XIC fell 1.2 per cent, XDV 2.1 per cent and CDZ 1.4 per cent.
On yield, dividend ETFs deliver the goods. XDV's yield these days is in the area of 4.5 per cent, while XIC and VCN yield 3.1 and 2.5 per cent, respectively. Also, barring a severe worsening of global economic prospects, the monthly flow of income from dividend ETFs is more or less safe. If you're strictly an income investor, you should be fine with all of this and ready to let the share price of your stocks do what it will.
But if you're after total returns, dividends plus share price changes, then consider the role of dividend stocks in your portfolio.
Have you taken money out of bonds to put in these stocks? Have you used them as a proxy for the Canadian stock market rather than holding the sort of broader selection of stocks we see in the S&P/TSX composite index?
If so, give some thought to diversifying your dividend stocks. In the Brexit stock market stress test, they graded out at just a D.
Rob Carrick