If you’re a diligent dividend growth investor, you have to be underwhelmed by what you’re seeing from ETFs and mutual funds.
Dividend growth is one of the most meaningless terms in the fund world. Too often, this term means a growth-oriented equity fund that holds dividend stocks. Avoid these funds if you’re after true dividend growth, which means stocks that reliably increase their quarterly cash payouts to shareholders every year or so.
Some funds do use dividend growth as part of their stock selection process. For example, there’s the iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (CDZ-T). The index that this exchange-traded fund is based on is built by screening stocks for factors that include five consecutive years of dividend growth. Raising dividends annually for five years at least is a good start, but you’d want to pay close attention to the magnitude of those increases. Is the company maintaining a consistent and impressive level of dividend growth, or is it treading water or, worse, losing momentum on the level of increases?
Two ETFs that make strong dividend growth a core part of their mission are just about to hit their first birthday, which means there’s a fair argument for ignoring them until more of a track record emerges. Official performance numbers aren’t available yet, but you can at least chart them on Globeinvestor.com. One of these ETFs is the Bristol Gate Concentrated Canadian Equity ETF (BGC-T) and the other is the Bristol Gate Concentrated U.S. Equity ETF (BGU-T). Together, they have about $62-million in assets.
Both of these ETFs hold between 20 and 25 stocks that were chosen using what the company describes as a data-driven screening process. Free cash flow is a major selection factor – that means cash available to investors and creditors of a company.
Both ETFs are based on portfolios that Bristol Gate has been running for several years. The average annual dividend growth is 20.9 per cent in the U.S. portfolio going back to 2009, and 12.3 per cent for the Canadian portfolio going back to 2013. Returns for the underlying portfolios have exceeded index returns over most time frames, but we have yet to get any idea of how the ETFs perform. Real-world performance numbers are particularly important because both funds have a high management expense ratio of 0.85 per cent.
If you’re a dividend growth investor who appreciates the simplicity and diversification of ETFs, then keep an eye on BGC and BGU. A rarity in the fund world, they make dividend growth the focus of what they do.
Rob Carrick