There’s a tension in dividend investing between targeting yield and growth.
Dividend growth is a foundational investing strategy because it provides a rising stream of income that will very likely outpace inflation, even at current rates. Rising dividends also support higher share prices, and they offer assurances that a company is well-managed.
Seeking to maximize dividend yield typically means emphasizing the here and now over the future. Exceptions may be found, but a high-yielding stock typically has a dividend payout that is static or rising only by token amounts.
Low interest rates are a reason why an investor may sacrifice dividend growth for yield these days. Yes, we all know rates are rising. But the dramatic increase in the five-year Government of Canada bond in 2021 only brought us to 1.3 per cent as of mid-December. With inflation at 4.7 per cent, that’s hard to swallow.
It’s perhaps this line of thinking that prompted a reader to recently ask about dividend ETFs that are based on shares with the highest dividend payouts. To find this type of a fund, let’s start with the Canadian Dividend ETFs section of the latest Globe and Mail ETF Buyer’s Guide. An obvious candidate is the iShares S&P/TSX Composite High Dividend Index ETF (XEI-T), which starts with stocks on the S&P/TSX Composite with a dividend yield above the median and then chooses the 75 with the highest yield from that subgroup.
Globeinvestor.com shows XEI with a dividend yield of 3.8 per cent, which is not quite at the top of the Canadian dividend ETFs tracked in the ETF Buyer’s Guide. Leading the group by yield is the BMO Canadian Dividend ETF (ZDV-T), which has a yield of 3.95 per cent. Two more dividend ETFs with a 3.8 per cent yield: the iShares Canadian Select Dividend Index ETF (XDV-T) and the Invesco Canadian Dividend Index ETF (PDC-T).
The word “high” in the name of a dividend ETF isn’t a guarantee of plus-sized dividends. For example, the yield for the Vanguard FTSE Canadian High Dividend Yield Index ETF (VDY-T) is 3.5 per cent, according to Globe Investor.
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