With central banks putting the brakes on interest rates, income-seeking investors are taking a fresh look at strong dividend-paying stocks.
The Bank of Canada is standing pat on interest rates after hiking them five times since 2017. And the U.S. Federal Reserve Board has also paused activity on its benchmark rate this year amid economic uncertainty.
When interest rates rise, dividend-paying stocks can suffer as higher-yielding bonds become more attractive. That threat is now on the back burner, while falling interest rates have become a possibility.
Because picking high-yielding stocks can be difficult – as some companies may not be able to continue juicy payouts – exchange-traded funds (ETFs) offer a more diversified way to invest in these securities.
We asked three ETF experts for top picks among dividend funds.
Daniel Straus, head of ETF research and strategy, National Bank Financial Inc., Toronto
Management expense ratio (MER): 0.40 per cent
Dividend yield: 3.5 per cent
This ETF will appeal to investors who want to own strong dividend-yielding stocks with less volatility, says Mr. Straus. “The ETF attempts to deliver a higher yield than the broad market, while offering some downside protection.”
The low-volatility criteria can help investors avoid “dividend traps” when company payouts may not be sustainable, he adds.
Top holdings include Kimco Realty Corp., Altria Group Inc. and Iron Mountain Inc. Launched in 2017, this ETF can be a less-risky alternative to a regular U.S. dividend ETF, but it might also lag in rallying markets, he says.
In a market downturn, however, this unhedged ETF could benefit from a rising U.S. dollar compared with the loonie as a flight to safety can prop up the greenback, he notes. The ETF’s fee, he says, is in the middle of the pack among its peer group.
MER: 0.91 per cent
Dividend yield: 0 per cent
This active global equity ETF is suited to investors seeking dividend stocks for capital growth rather than yield, Mr. Straus says.
Investors can still replicate yield by selling fund units, but returns are not guaranteed, he notes. This ETF, which invests in a mutual fund run by Dynamic Funds, has an impressive record, he says. With a 24.1-per-cent annualized total return from inception in January 2017, to March 31, the ETF has outpaced the 10.8-per-cent gain for the MSCI World Index in Canadian dollars.
This ETF, which can own stocks without dividends, targets a yearly payout but did not have one in 2018. Top holdings include Keysight Technologies Inc. and Lululemon Athletica Inc. The fee for this ETF is on the pricier side and is more appropriate as a satellite – rather than a core – portfolio holding, he adds.
James Gauthier, head of ETF and mutual fund research, Industrial Alliance Securities Inc., Toronto
The pick: BMO Canadian Dividend ETF (ZDV-TSX)
MER: 0.39 per cent
Dividend yield: 4.9 per cent
The appeal of this Canadian dividend ETF is that it holds stocks that are weighted equally, instead of by market value, to avoid high concentration in a financial- and energy-heavy market, says Mr. Gauthier.
“Another ETF in this space, for example, has a 65-per-cent weighting in financials, while the BMO ETF is 35 per cent financials.”
Dividend ETFs can still underperform the broader market in tough times, he notes. In 2018, this ETF shed 10.7 per cent compared with a loss of 8.9 per cent for the S&P/TSX Composite Index, including dividends. The ETF’s fee is near the lower end among its peers, he adds.
The pick: BMO U.S. Dividend CAD ETF (ZDY-TSX)
MER: 0.34 per cent
Dividend yield: 2.8 per cent
This ETF, which invests in U.S. stocks weighted equally, targets companies offering stable and sustainable dividends as opposed to absolute yield, says Mr. Gauthier.
“It can be argued that the quality of the companies in this ETF exceeds the quality of ETFs where absolute yield is the focus,” he says.
The fund, which has a monthly payout, tends to own companies with lower earnings volatility and good dividend growth, he adds; it could lag, however, when high-growth technology companies and resources do well. Utilities represent 15 per cent of the ETF, followed by 14 per cent each in consumer discretionary and information technology. Holdings include IBM Corp., AT&T Inc., Abbvie Inc. and Pfizer Inc. The ETF’s fee is near the lower end for its peer group, he adds.
Alex Bryan, ETF and mutual fund analyst, Morningstar Inc., Chicago
MER: 0.22 per cent
Dividend yield: 3.2 per cent
This global dividend ETF is a good core holding for investors because it owns companies with above-average yields that are also high-quality firms, says Mr. Bryan. “It’s a good way of boosting yield without taking on too much risk.” With high-yielding stocks, “you will [often] end up owning riskier areas of the market,” he notes.
This ETF, which focuses on developed markets, has a monthly payout. It filters out stocks with high payout ratios that may not be sustainable and owns strong companies as measured by return on equity, debt to equity and earnings-growth consistency. Top sectors include health care, at 19 per cent, and consumer staples, at 17 per cent. Holdings include Exxon Mobil Corp., Nestlé SA and Pfizer. This ETF’s fee is competitive with those of its peers, he adds.
MER: Not available (management fee is 0.35 per cent)
Dividend yield: N/A
This ETF targets higher-yielding U.S. dividend stocks and provides broad diversification across industry sectors, says Mr. Bryan. The strategy aims to sidestep stocks with the highest payout ratios in case they can’t be sustained, he notes.
Companies are compared with sector peers as well as with firms in different industries to avoid biases that can occur when focusing only on the latter, he adds.
Launched last fall, this ETF has a monthly payout and tracks an index developed by Fidelity Management & Research Co. Top holdings include Dominion Energy Inc., Southern Co. and Apple Inc.
Because the names have a value tilt, they could lag when growth stocks have momentum, while the fund’s interest-sensitive stocks, such as utilities, could suffer when rates rise, Mr. Bryan notes.
The ETF’s fee is not unreasonable but could be lower, he adds.