Skip to main content

A Toronto Stock Exchange (TSX) logo is seen in Toronto Nov. 9, 2007.Mark Blinch/Reuters

The rule of dividend stocks on the Toronto Stock Exchange appears to be done for now.

The relative performance of the S&P/TSX composite and S&P/TSX Canadian Dividend Aristocrats indexes tells the story. The composite was up 4 per cent for the 12 months to March 31, while the dividend aristocrats gained just 1.3 per cent. The gap has widened in 2015, with the composite up 1.8 per cent and the Aristocrats down 3.3 per cent.

Dividend stocks were the no-brainer path to investing success coming out of the last market crash, and some continue to do well. But if your investing strategy is to put money into ETFs or mutual funds with a "Canadian dividend fund label," you might want to reconsider. An ETF tracking the broad Canadian market – dividend payers and non-payers – might make more sense.

It's not just the dividend aristocrats index that has lagged lately. The BMO Canadian Dividend ETF (ZDC) holds a portfolio of stocks that has underperformed a sister fund that tracks the S&P/TSX composite index this year. Same goes for Vanguard's Canadian dividend ETF and its broad market Canadian equity ETFs.

A heavy concentration of financial and energy stocks is weighing on some dividend ETFs. The Vanguard Canadian High Dividend Yield Index ETF (VDY) has close to 80 per cent of its assets in these two sectors, compared to 56 per cent for the Vanguard FTSE Canada All Cap Index ETF (VCN). Year to date, energy and financials are two of the worst performing sectors on the TSX.

The best performing TSX sectors this year have been health care and information technology. Together, these two sectors make up 8 per cent of the S&P/TSX composite index and 4 per cent of the S&P/TSX Canadian Dividend Aristocrats Index. Valeant Pharmaceuticals is the top-performing stock in the composite index this year, up 50 per cent. It's now the second largest stock in the composite index, but nowhere to be found in the aristocrats index.

If you're investing for dividend income, you'll find that dividend ETFs still offer an extra percentage point or less of yield. But if you're after a total return based on share price changes and dividends, broad market exposure is more attractive in current market conditions. It looks like the day of the dividend stock is over for now.