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Dividend investing has so far weathered the disruptions of the pandemic in good shape.

Quite a few companies cut or suspended dividends as economic activity declined last year in the fight against the pandemic. But the big blue-chips that dividend investors gravitate toward mostly held up well.

Where dividend investing looks weak is in exchange-traded funds focusing on dividend stocks. These funds have been blown away by broad market ETFs that track the S&P/TSX Composite Index or similar. This isn’t an indictment of dividend investing or dividend ETFs, but rather a reality check for anyone who believes in the inherent superiority of dividend investing. If you’re after a total return based on both dividends and share-price gains, a broad market ETF may work better than a dividend ETF.

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Here are a few ETF pairings to make this point:

  • BMO Canadian Dividend ETF (ZDV) lost 3.3 per cent last year on a total return basis, made an annualized 1.9 per cent for the three years to Dec. 31 and 7.2 per cent for the five years to Dec. 31.
  • BMO S&P/TSX Capped Composite Index ETF (ZCN) made 5.8 per cent for the year to Dec. 31, 5.8 per cent annualized for the three years and 9.3 per cent for the five years.
  • iShares Canadian Select Dividend Index ETF (XDV) lost 0.5 per cent last year and posted annualized gains of 1.8 per cent and 7.7 per cent for the three- and five-year periods, respectively, to Dec. 31.
  • iShares Core S&P/TSX Capped Composite Index ETF (XIC) made 5.6 per cent last year and gained 5.8 per cent and 9.3 per cent for the three- and five-year periods.
  • Vanguard FTSE Canadian High Dividend Yield Index ETF (VDY) lost 1.1 per cent last year and made 2.6 per cent and 8.2 per cent for the three- and five-year periods.
  • Vanguard FTSE Canada All Cap Index ETF (VCN) made 4.9 per cent last year and gained 5.2 per cent and 8.9 per cent over the past three- and five-year periods.

There’s been a speculative growth orientation to the stock market since the post-crash rally began last April. Some dividend stocks have done well, but a diversified portfolio of stocks limited to those paying dividends has underperformed the broader market in a rather dramatic way. Therein lies opportunity for income investors.

Dividend yields and share prices move in opposite directions, which means the yields on dividend ETFs looked attractive in early 2021. Globeinvestor.com listed the yield for ZDV and XDV at 4.6 per cent and VDY at 4.4 per cent, which compares with 0.5 per cent for a five-year Government of Canada bond and 1.5 per cent to 1.9 per cent from guaranteed investment certificates issued by alternative banks and credit unions.

Dividend ETFs haven’t impressed in the past five years, but they’re looking good right now for income-seekers.

-- Rob Carrick, personal finance columnist

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.

Stocks to ponder

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Banco Santander SA (SAN-N) This is the Contra Guy’s first pick of the year. It’s the largest bank in Spain, and falls into the “too big to fail” category, according to the newsletter writers. Besides being geographically diverse, Santander has its hand in a multitude of pies beyond banking offering insurance, payroll management, financial advisory services, retail properties and more. Check out why they think there could be big gains ahead for the stock.

Enbridge Inc. (ENB-T) The energy infrastructure company, best known for its network of oil pipelines stretching from Alberta to refineries in the United States, is often vilified by environmentalists. But investors who prefer to align their portfolios with ESG principles – that is, own shares in companies that score well on environmental, social and governance factors – may be surprised to learn Enbridge scores rather well. David Berman reports.

The Rundown

Despite pandemic sales boost, grocery-store stocks trail rebound

Among the laggards of the pandemic, Canadian grocery stocks are perhaps the most surprising. Last March, when explosive demand saw panicked shoppers strip supermarket shelves bare, few would have predicted the big chains would be among the absolute worst-performing Canadian stocks 10 months later. But there they are, in the basement of the Toronto Stock Exchange, nestled among the real estate investment trusts and sad-sack resource names. Tim Shufelt explains what’s going on.

RBC predicts big stock gains in 2021 - but it comes with a catch

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RBC Capital Markets is out with its forecast for the S&P 500 for this year, and investors will no doubt find some encouragement in it. But Canada’s big bank is also warning of a near-term pullback. Darcy Keith has more details on its new forecast.

How investors can take advantage of big changes in REITs

There are some fundamental changes taking place in the REIT industry, and savvy investors can take advantage of them, writes Gordon Pape. Many REITs have been hit hard by the economic impact of the pandemic, especially those that focus on office space, the hospitality industry, and shopping malls. But some other types of REITs are profiting from the shift in consumer behavior we have seen in the past year.

A ‘buy’ is just a tap away: stock market dabblers drive trading boom into 2021

A 1000% jump in the penny stock of a company with no staff and a high school investing club that doubled its money are just two examples of the big gains to be made from a retail share trading boom that shows no sign of flagging in 2021. Thyagaraju Adinarayan and Saikat Chatterjee of Reuters report.

Rising U.S. bond market inflation gauge masks extent of pandemic shock

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A surge in the bond market’s best gauge of how much inflation investors expect in the years ahead could be underestimating how long the economic shock from the pandemic will last, even if the new Joe Biden administration pushes its proposed massive stimulus package through Congress quickly. Gertrude Chavez-Dreyfuss of Reuters reports.

Stimulus plans fuel Biden trade, but Wall Street wonders if it can continue

As Joe Biden takes over the presidency, investors are trying to determine how much fuel is left in trades betting on his policies, which have sparked outsized rallies in everything from cyclical stocks to shares of solar-powered companies. While stimulus, green policies and infrastructure have pushed the broad market to record highs, some investors are growing concerned that the rally may have run too far ahead. David Randall of Reuters reports.

Also see:

Pricey U.S. stock valuations put burden on earnings to keep rally going

Trump’s parting gifts to Biden: Roaring stocks, a weaker dollar, tons of debt

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Bitcoin, U.S. tech stocks seen as biggest market bubbles: surveys

Others (for subscribers)

Wednesday’s analyst upgrades and downgrades

Tuesday’s analyst upgrades and downgrades

Number Cruncher: These 20 Canadian stocks show strong price momentum

Oil price forecasts fall in the wake of the pandemic

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Outlook darkens for Wall Street as Biden’s regulators take shape

Globe Advisor

Tech stock booms: then and now

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Ask Globe Investor

Question: I have recently decided to retire early and will convert my locked-in retirement account (LIRA), which was set up with the commuted value of my defined benefit pension, into a life income fund (LIF). My understanding is that income from an employer-sponsored pension plan upon retirement is eligible for income splitting regardless of age. Is this correct? Does this also apply to an LIRA converted into an LIF? I am a few years away from turning 65, but I would like to start pension splitting with my spouse soon if possible.

Answer: We asked Lea Koiv, a tax, pension and retirement expert with Lea Koiv & Associates, to answer your question. Here’s her response:

“The reader is correct that regular monthly pension payments from a registered pension plan qualify for pension splitting, regardless of age. (One notable exception: Quebec has an age 65 requirement.) The amounts can be paid from the plan itself, or from an annuity acquired directly with plan funds. The spouse or common-law partner to whom the income is allocated can also be of any age. Each will also be able to claim the pension credit – up to a maximum of $2,000 for federal tax purposes – regardless of age. (The pension credit varies for provincial tax purposes.)

“Unfortunately, income from an LIF or RRIF (registered retirement income fund) does not qualify for splitting until the year in which the LIF/RRIF owner attains age 65. The pension credit of up to $2,000 can also be claimed in that year. The spouse or common-law partner to whom LIF/RRIF income is allocated can be of any age, but will only be able to claim the pension credit of up to $2,000 where they have attained age 65 by the end of that year. For LIF/RRIF income, there is an exception to the above rules where the amount is received as a consequence of the death of a spouse or common-law partner.

“Before commuting their pensions, plan members need to consider many factors, including the potential tax savings available from pension splitting.”

What’s up in the days ahead

David Berman examines what’s behind the electric-vehicle bump for General Motor shares.

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

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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