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In one of the most eagerly anticipated investing developments this fall, federal regulators have given the banks the go-ahead to resume dividend increases.

Which bank will raise dividends the most, and which will be first to declare a higher dividend? If you prefer to skip the guessing game, try this. Buy an equal amount of each of the Big Six banks and scoop up higher dividends from all.

Regulator will allow banks, insurers to raise dividends effective immediately

The BMO Equal Weight Banks Index ETF (ZEB-T) is one way to do this. I’ve written about ZEB a couple of times lately – once to note its bloated management expense ratio and again to mark a hefty reduction in the MER to its current level of 0.28 per cent. That’s not exactly a bargain, but it’s a strong improvement over the old 0.6 per cent.

Now, let’s see how well ZEB works as a vehicle for participating in rising bank dividends. What you get with ZEB is roughly a 15-per-cent weighting in each of the Big Six banks, and access to their dividends. When the banks in the portfolio raise their quarterly payouts, it’s reflected in the cash distributed to unitholders each month.

ZEB has been paying out 10 cents a share each month through this year and last, and the current yield is 3.1 per cent. In 2019, ZEB started the year at 8.5 cents a share, increased to nine cents in May and then to 10 cents in December.

ZEB moved from variable quarterly to level monthly payments in 2011, with changes in the distribution coming only when banks boosted their dividend payments. The monthly payout in January, 2011, was 4.8 cents, less than half of the current amount.

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Banks pay their dividends quarterly and have different payout dates. This presents an issue for ZEB in paying level monthly amounts, which is a big attraction for income-focused investors. To smooth payments out through the year, a return of capital is blended with dividends.

You can see how this works in the distribution breakdown for 2020. The total payout was, of course, $1.20. Eligible dividends – you get the full benefit of the dividend tax credit in non-registered accounts – accounted for $1.11 of that amount and a return of capital accounted for the rest.

In a non-registered account, a return of capital isn’t taxed in the year you receive it. Instead, it lowers the adjusted cost base for an investment, thereby increasing your capital gain when you sell at a profit.

A large return of capital component suggests a fund is paying unitholders with their own money to sustain distributions. However, ZEB’s ROC is fairly small in comparison to the amount of actual dividends paid out. You’re mainly getting bank dividends, with increases likely coming soon.

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