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.
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
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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.
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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.”
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Compiled by Globe Investor Staff