Need a way to generate a reliable flow of dividend income? Consider a dividend-focused exchange-traded fund or mutual fund.
Want dividend growth? Forget the fund and look to individual stocks.
"If you think you can build income with mutual funds or ETFs, think again," dividend expert Tom Connolly writes in an edition of his Dividend Growth newsletter from last fall. "Funds are not noted for providing growing income."
Consider the $854-million BMO Canadian Dividend ETF (ZDV), a dividend fund that was included in a recent installment of the Globe and Mail ETF Buyers' Guide. ZDV has paid out 63 cents of income through the first four months of 2017, up from 55 cents over the same period a year earlier. In 2015, the fund paid 60 cents per month; in 2014, it started at 65 cents and ended up at 62 cents. You get the picture – dividend income will vary widely.
Now check out the $18.2-billion RBC Canadian Dividend Fund, a strong long-term performer with a 20-year compound average annual gain of 9.4 per cent (the S&P/TSX composite total return index made 7.4 per cent over that period). In 2016, the fund paid out 86 cents in dividend income, a big increase over the 68 cents paid in 2015. Between 2009 and 2014, however, the amount of dividends paid out ranged between 54 and 66 cents. Dividend payouts totaled 18 cents per unit through the first three months of 2017, which projects out to 72 cents over 12 months. Again, the amount of dividends you get will vary.
There are no guarantees that today's strong dividend growth stocks will continue to increase their payouts. But some stocks do have an impressive history. Royal Bank of Canada has increased its dividend twice a year since 2012. The bank took a three-year dividend growth break following the global financial crisis, but prior to that it was a dividend growth star. The latest quarterly dividend payout was 83 cents per share. One year ago, it was 79 cents; five years ago, the comparable amount was 54 cents.
Dividend funds can certainly be relied on to deliver income every quarter or month. But if you want dividend growth, go with well-chosen individual stocks.