I’m too old to go trick or treating. But with all the money I’m making on dividend stocks, I might just buy myself a big pile of candy to celebrate.
For the 12 months through Sept. 30, my model Yield Hog Dividend Growth Portfolio has posted a total return of about 26.4 per cent. My personal portfolio, which includes most of the same stocks and a few others, is also rolling right along. And with the Bank of Canada slashing its key lending rate by half a percentage point this week, and more cuts almost certainly on the way, I expect that dividend stocks will continue to benefit.
That’s great, you say. But what if you don’t have the time or knowledge to manage a portfolio of individual dividend stocks?
That’s where dividend exchange-traded funds come in.
With a single purchase, dividend ETFs give you a diversified basket of stocks that will generate a growing stream of monthly income. So, instead of spending your time monitoring individual companies and worrying when one of them has a setback, you can sit back and collect (or reinvest) your cash without having to play portfolio manager.
Another plus is that, if your brokerage offers commission-free ETF purchases and sales, you can keep your trading costs to a minimum. Yes, you’ll pay an ongoing fee for the convenience of holding a basket of stocks that someone else manages, but with most dividend ETFs charging a management expense ratio (MER) of less than half a per cent, it’s not going to break the bank.
What’s more, there’s no law that says you can’t own a mix of individual stocks and ETFs. That’s precisely what I do in my model and personal portfolios, and it takes the stress out of reinvesting money. If I’m having trouble deciding how to invest some cash I have on hand, I just dump it into an ETF and call it a day.
Below, I’ve selected five dividend ETFs that offer a nice combination of diversification and strong performance. Plus, the Canadian dividend income distributed by these ETFs qualifies for the dividend tax credit, which means more of your income will stay in your pocket if you hold them in a non-registered account. But it’s perfectly acceptable to hold them in a registered account, too.
The past year has been very good for dividend stocks, and I wouldn’t expect a repeat of such strong performance over the next 12 months. But the beauty of dividend stocks and ETFs is that they keep paying you, whether the market goes up, down or sideways. And, over time, that income should continue to grow.
BMO Canadian Dividend ETF (ZDV)
MER: 0.39%
Holdings: 55
*Yield: 3.7%
**1-yr. Return: 26.3%
All the classic dividend payers are here: banks, pipelines, insurers, telecoms, infrastructure companies, railroads. The MER is reasonable, and it’s hard to argue with ZDV’s recent performance.
iShares Canadian Select Dividend Index ETF (XDV)
MER: 0.55%
Holdings: 31
Yield: 4.4%
1-yr. Return: 27.6%
Investors seeking income will appreciate XDV’s above-average yield. The 56-per-cent weighting in financials is on the high side, but with a few exceptions (looking at you, Toronto-Dominion Bank) the sector has performed well.
iShares S&P/TSX Composite High Dividend Index ETF (XEI)
MER: 0.22%
Holdings: 76
Yield: 4.9%
1-yr. Return: 22.9%
XEI’s high yield and low MER make it an attractive pick. If you’re bullish on energy, this ETF’s 31-per-cent weighting in the sector provides above-average exposure, with Canadian Natural Resources Ltd. and Suncor Energy Inc. the ETF’s two largest holdings.
Vanguard FTSE Canadian High Dividend Yield Index ETF (VDY)
MER: 0.22%
Holdings: 56
Yield: 4.3%
1-yr. Return: 27.3%
VDY’s heavy concentration in Canadian banks – the Big Five account for about 43 per cent of the fund – may not be for everyone. But it doesn’t seem to have hurt the ETF’s performance. The low MER is another plus.
Hamilton Enhanced Multi-Sector Covered Call ETF (HDIV)
MER: 2.67%
Holdings: 9
Yield: 10.5%
1-yr. Return: 33%
Normally, I’m not a fan of covered-call ETFs, because they tend to lag their plain-vanilla counterparts. Not so with HDIV. This fund, whose underlying portfolio consists of 11 other Hamilton ETFs, has outperformed competitors thanks in part to its exposure to U.S. tech companies and its use of modest leverage of 25 per cent, which boosts results in a rising market. Interest costs on that leverage are reflected in the fund’s higher-than-average MER.
* Yield is calculated as total cash distributions over the previous 12 months divided by the unit price at noon on Oct. 25.
** Returns for the 12 months through Sept. 30 are after fees and assume all dividends were reinvested in additional units.
Disclosure: The author owns units of ZDV, XDV and HDIV
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.