The Canadian stock market’s problem with diversification is a particular challenge for dividend investors.
The S&P/TSX composite index is close to one-third weighted to financial stocks. Because so many financials are good dividend-payers, investors seeking dividend income can end up with much higher levels of exposure to banks, insurers and investment firms. In the installment of the 2019 Globe and Mail ETF Buyer’s Guide covering Canadian dividend ETFs, there were funds with as much as 65 per cent of their portfolios in financial stocks.
Adding some U.S. or global dividend ETFs to your portfolio is a way to break the dominance of financial stocks in a dividend portfolio. In this final installment of the buyers’ guide, you’ll find funds with much lower exposure to financials than their Canadian counterparts and much bigger holdings in sectors like health care and technology, where the Canadian stock market is weak.
Dividends from these funds aren’t eligible for the dividend tax credit in non-registered accounts, as cash payouts from Canadian companies generally are. But dividends from foreign companies can still provide a steady flow of monthly or quarterly income (for more tax details on this category of ETF, consult our ETF Tax Primer).
Many U.S. and 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. 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.
One final note – international refers to markets outside North America, while global means a focus on the United States and the rest of the world.
Click here to download an Excel version of the 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 a continuing 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 make adjustments to the portfolio of investments; add the TER to the MER for a full picture of a fund’s cost.
Yield: Supplied by Globeinvestor.com or ETF company websites and based on the recent pattern of monthly payouts and the latest share price; may reflect payments of dividends, bond interest and return of capital.
Returns: ETF companies show total returns, or share-price change plus dividends or distributions.
Three-year beta: Beta is a measure of volatility that compares funds to a benchmark stock index, which always has a beta of 1.0. A lower beta means less volatility on both the up and down side. Beta offers a chance to see how well low-volatility ETFs deliver.
Notes: Market data as of April 9; annualized total returns to March 31
Rob Carrick