Stocks have been strong lately, but a contingent of Canadian blue chips has been frozen out.
Companies in this group include Canadian Tire Corp. (CTC.A-T), Bank of Nova Scotia (BNS-T), TC Energy Corp. (TRP-T) and BCE Inc. (BCE-T). All of them have dividend yields in the 5-per-cent to 8-per-cent range, which is a reflection of how out of favour they are with investors.
Here’s another thing these stocks have in common: they’re all Top 10 holdings in the $1.6-billion iShares Canadian Select Dividend Index ETF (XDV-T), which itself has a yield of 5.3 per cent based on its latest payout to investors. If you’re interested in capturing the yield of out-of-favour dividend stocks in a diversified way that limits risk somewhat, consider XDV.
XDV’s one-year performance to Feb. 29 was a loss of 0.3 per cent, which compares to gains of around 4 per cent for some other dividend ETFs. XDV tracks the Dow Jones Canada Select Dividend Index, which is built using criteria including dividend growth, yield and payout ratio. Just now, this approach has produced a group of underperformers compared with the broader market.
Some dividend ETFs have a big energy weighting, which means exposure to strong performers such as Canadian Natural Resources Ltd. (CNQ-T). XDV has just 7 per cent of its assets in energy. More than 56 per cent is in financials, which have broadly done reasonably well lately. It just happens that Scotiabank, the fifth biggest holding in XDV, is a laggard in the sector.
BCE is representative of the quandary dividend-hungry investors face right now. The yield has ballooned to 8.5 per cent after a 23-per-cent 12-month decline in the share price. BCE recently increased its dividend payout by 3.1 per cent, right in line with inflation. But the falling share price and high yield highlight the concern investors have about the sustainability of BCE’s current dividend policy.
XDV has a weighting of around 4.7 per cent in BCE, while Canadian Tire represents about 8.5 per cent of the portfolio, Scotiabank about 5.6 per cent and TC Energy about 5 per cent. This diversification limits the risk if any one of these stocks further disappoints investors.
If your investing goal is growth, more so than income, owning XDV would be a long-term project. But this ETF is worth a look if you’re open to owning high-yielding dividend stocks that have been frozen out of today’s hot stock market.
Rob Carrick