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If given a letter grade for their performance this year, dividend ETFs might get a D from a lenient investor.

Exchange-traded funds holding dividend stocks have to be ranked among the biggest disappointments of the bear market triggered by the pandemic. It’s shocking how much worse they’ve done than the S&P/TSX composite index.

A prime example is the iShares S&P/TSX Canadian Dividend Aristocrats Index ETF​ (CDZ-T), which was down 23.9 per cent for the year through April 27, compared with a loss of 13.2 per cent for the iShares Core S&P/TSX Capped Composite Index ETF (XIC-T). And these are total returns – share-price changes plus dividends.

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Big declines in the price of dividend ETFs means big increases in their dividend yield. CDZ had a dividend yield of about 5.3 per cent at midweek, while the BMO Canadian Dividend ETF (ZDV-T) was at 5.7 per cent. A five-year Government of Canada bond had a yield of 0.4 per cent at the same moment, while five-year guaranteed investment certificates peaked in the mid-2-per-cent range for a five-year term.

The comparatively high yields for dividend ETFs reflect the stress being felt by their holdings of dividend stocks. There’s a stereotype of dividend stocks as utilities, pipelines, telecoms, railroads, banks and other blue-chip pillars of the economy. But the dividend-paying universe as reflected in dividend ETFs is much broader. It includes many medium-sized and small companies, some in cyclical sectors such as energy, that are faring poorly right now.

The number of companies cutting or suspending dividends is long – you can catch up here. A slow ramping up back to normal levels of economic activity would mean more dividend cuts by companies forced to conserve cash.

If you buy a dividend ETF today, it’s quite possible that the amount of cash paid monthly will decline over the next year. Keep that in mind if you are mainly focused on dividends for income. But if you’re a total-return investor seeking both growth and dividends, then dividend ETFs offer a bigger opportunity to buy low than ETFs tracking the broader Canadian market.

-- Rob Carrick

This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.

The Rundown

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Big 5 tech stocks are dominating the U.S. market. Here’s a clever trade to profit what what comes next

The five largest stocks dominate U.S. equity markets to an even greater extent now than at the peak of the tech bubble and this is bad news for investors. This type of narrow, rich-get-richer rally, with a few mammoth companies driving benchmark returns higher while the rest of the market lags far behind, is fragile and makes significant corrections more likely. For sophisticated investors, Scott Barlow outlines a clever way to profit from what may come next. (for subscribers)

Before buying into this rally, there are four things every wise investor should know

As stock markets continue their recovery, the struggle against the coronavirus is far from over. Here are a few things David Rosenberg thinks are worth highlighting to wise investors. (for subscribers)

Are dividend aristocrats still safe bets? Exxon provides a clue

The dazzling stock market rally over the past six weeks hasn’t smoothed over a lingering concern for investors: Just how safe are dividend payouts from the most reliable cash-generating companies? David Berman looks at the issue. (for subscribers)

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It’s time to review your portfolio. Here are some stocks to hold and some to fold

The investing world has changed almost overnight. Some securities are holding up well during the COVID-19 crisis, but others that seemed rock solid a few weeks ago are being battered. Given these dramatically changed circumstances, Gordon Pape says we need to review our portfolios and get rid of positions that are likely to drag down our returns for months and even years to come. He outlines some stocks he thinks are still worth holding - and others that need to go. (for subscribers)

Commodities ripe for a rebound

The near shutdown of the economy in response to COVID-19 has reduced demand for commodities like oil, lumber and copper and triggered sharp drops in their prices, but some analysts predict the stage is set for a rebound. Alex Veiga of Reuters tells us more. (for subscribers)

Others (for subscribers)

The week’s most oversold and overbought stocks on the TSX

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Friday’s analyst upgrades and downgrades

Thursday’s analyst upgrades and downgrades

‘Do the right thing’: Pandemic puts workers’ rights on ethical investor hitlist

Oil prices set for deeper fall in 2020, even as lockdowns ease: poll

Buffett likely to finally address pandemic at Berkshire Hathaway meeting

Funds suggest cutting stocks, expect U-shaped global economic recovery

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Number Cruncher: Five Canadian cannabis stocks likely to survive COVID-19 crisis

Number Cruncher: Six actively managed funds that survived a bruising first quarter

Others (for everyone)

Stocks face test as reopenings could fuel demand - or more coronavirus

Amazon is Wall Street’s biggest winner from coronavirus

Ask Globe Investor

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Question: For an interlisted stock such as Royal Bank of Canada (RY) that trades on both the Toronto Stock Exchange and New York Stock Exchange, if I believe the Canadian dollar is going to fall to about 60 US cents because of the pandemic, would it make sense to buy Royal Bank on the NYSE to profit from the change in the exchange rate?

Answer: No. Presumably what you are suggesting is that, when you sell Royal Bank and convert the U.S. dollar proceeds back into (cheaper) Canadian dollars, you’ll come out ahead. But you are only looking at one side of the currency impact.

Let’s assume, for simplicity, that Royal Bank’s share price will remain more or less steady on the TSX. If your currency prediction is correct and the Canadian dollar falls then – all else being equal – Royal Bank’s share price on the NYSE will also have to fall. Why? Well, the flip side of a falling Canadian dollar is a stronger U.S. dollar, and investors would now need fewer U.S. dollars to purchase a share of Royal Bank. So what you gain from a falling Canadian dollar you lose in Royal Bank’s lower share price on the NYSE.

This is a simplified example, but the lesson is that you can’t use interlisted stocks to capitalize on fluctuations in the exchange rate. The currency effects cancel each other out.

But there’s another – more important – reason to buy interlisted stocks on the TSX: You avoid currency conversion costs. Every time you convert Canadian dollars to U.S. dollars, or vice-versa, your broker effectively dings you for roughly 1 per cent to 2 per cent of the trade value by buying or selling the currency at a rate that is favourable to your broker – and not favourable to you. So buy your interlisted stocks at home and save your money.

--John Heinzl

What’s up in the days ahead

This weekend, John Heinzl looks at four investing lessons from the pandemic, and Rob Carrick reports on how the March stock market crash seems to have sharpened the appeal of digital investing through roboadvisers and online brokers.

Click here to see the Globe Investor earnings and economic news calendar.

More Globe Investor coverage

For more Globe Investor stories, follow us on Twitter @globeinvestor

Click here share your view of our newsletter and give us your suggestions.

You may also be interested in our Market Update or Carrick on Money newsletters. Explore them on our newsletter signup page.

Compiled by Globe Investor Staff

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