How to take the sting out of slumping Canadian dividend stocks: Diversify globally.
The sixth and final installment of the Globe and Mail ETF Buyer’s Guide covers U.S. and international dividend stocks, which have been steady performers. As documented in the fifth buyers’ guide installment, Canadian dividend ETFs have been pretty bad .
There are tax implications from receiving foreign dividends through ETFs in both taxable and registered accounts – consult our ETF tax primer for details. But there are some good reasons for diversifying your Canadian dividend standbys with ETFs focusing on dividend stocks listed in the United States and internationally (outside North America):
-Low correlation to Canadian dividend stocks: For the better part of five years, dividend ETFs focusing on markets outside Canada have been stronger than our domestic dividend funds.
-Sector diversification: Financial and energy stocks dominate Canadian dividend ETF portfolios, while tech and industrials are often top sector weightings in foreign dividend funds.
-Strong total returns for investors seeking growth as well as income: Yields from U.S. and international dividend ETFs are a little below the levels of Canadian dividend funds, but their share price appreciation has been better. Total returns are the combination of dividends plus share price changes.
Most global dividend ETFs come in versions with and without currency hedging, which prevents changes in the value of the Canadian dollar from distorting returns generated by investments outside the country. Non-hedged funds are generally the most popular choice these days, likely because the Canadian dollar has been falling in recent years.
A falling Canadian dollar means unhedged U.S. and international ETFs will outperform those with hedging. With a rising dollar, hedged funds will outperform. If you’re investing for 10-plus years, both hedged and unhedged funds should perform similarly.
Click here to download an Excel version of the ETF Guide.
Assets: Shown to give you a sense of how interested other investors are in a fund.
Management expense ratio (MER): The MER is the main cost of owning an ETF on an ongoing basis; published returns are shown on an after-fee basis.
Trading expense ratio (TER): The TER is the cost of trading commissions racked up by the managers of an ETF as they maintain a portfolio over the years. Add the TER to the MER for a fuller picture of a fund’s cost. Many ETFs in the U.S. and international dividend category have low TERs, but there are exceptions.
Dividend yield: Supplied by Globeinvestor.com and based on recent monthly or quarterly payouts and the latest share price. Note that foreign dividends are taxed as regular income. They’re not eligible for the dividend tax credit, which lightens the tax load on dividends from Canadian corporations that are received in a non-registered account.
Average daily trading volume: ETFs listed here have generated recent trading volumes of at least 3,500 or so shares a day on average on the TSX. This level of trading is sufficient to indicate a fund has at least something of a following and is not an orphan.
Top sector weightings: Financial stocks have a lower weighting in U.S. and international dividend ETFs than in Canadian dividend funds. That’s a plus for Canadian investors, who tend to be heavily exposed to banks and other financials.
Returns: ETF companies typically disclose total returns, or share-price change plus dividends or distributions.
Notes: Market data as of April 17. Average daily trading volume is for the previous 30 days. Fund returns are annualized to March 31.