If given a letter grade for their performance this year, dividend ETFs might get a D from a lenient investor.
Exchange-traded funds holding dividend stocks have to be ranked among the biggest disappointments of the bear market triggered by the pandemic. It’s shocking how much worse they’ve done than the S&P/TSX composite index.
A prime example is the iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (CDZ-T), which was down 23.9 per cent for the year through April 27, compared with a loss of 13.2 per cent for the iShares Core S&P/TSX Capped Composite Index ETF (XIC-T). And these are total returns – share-price changes plus dividends.
Big declines in the price of dividend ETFs means big increases in their dividend yield. CDZ had a dividend yield of about 5.3 per cent at midweek, while the BMO Canadian Dividend ETF (ZDV-T) was at 5.7 per cent. A five-year Government of Canada bond had a yield of 0.4 per cent at the same moment, while five-year guaranteed investment certificates peaked in the mid-2-per-cent range for a five-year term.
The comparatively high yields for dividend ETFs reflect the stress being felt by their holdings of dividend stocks. There’s a stereotype of dividend stocks as utilities, pipelines, telecoms, railroads, banks and other blue-chip pillars of the economy. But the dividend-paying universe as reflected in dividend ETFs is much broader. It includes many medium-sized and small companies, some in cyclical sectors such as energy, that are faring poorly right now.
The number of companies cutting or suspending dividends is long – you can catch up here. A slow ramping up back to normal levels of economic activity would mean more dividend cuts by companies forced to conserve cash.
If you buy a dividend ETF today, it’s quite possible that the amount of cash paid monthly will decline over the next year. Keep that in mind if you are mainly focused on dividends for income. But if you’re a total-return investor seeking both growth and dividends, then dividend ETFs offer a bigger opportunity to buy low than ETFs tracking the broader Canadian market.
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Rob Carrick