Canada’s Guide For Dividend ETF Investing

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The importance and impact of dividends when investing over a long-time horizon have been well established. When looking at the price return and total return of both the S&P/TSX Composite Index and the S&P 500 Index, the difference in performance is attributable to dividend reinvestment. As demonstrated in the following chart, that difference is material in nature.

Differing Approach to Dividend Investing Given the importance of dividends, some investors take a ‘dividend-focused’ approach to their equity investing. As such, differing ETF strategies provide distinct approaches to dividend investing. The following are prevailing dividend ETF investing approaches that investors can utilize as they integrate dividend investing into their portfolios.

Dividend Growers and Initiators Companies that have issued and grown their dividend payouts have historically provided greater total returns with less volatility, making this approach to dividend investing the most common. The S&P 500 Dividend Aristocrats Index and S&P/TSX Canadian Dividend Aristocrats Index are good barometers for assessing this investing approach for investors interested in having concentrated exposure to companies classified as dividend growers. A Dividend Aristocrat is a company that has paid – and increased – its base dividend every year for at least 25 consecutive years. In looking at the long-run performance of the S&P 500 Index and S&P/TSX Composite Index relative to the S&P 500 Dividend Aristocrats Index and S&P/TSX Canadian Dividend Aristocrats Index, respectively, the latter indices have outperformed the former over the long term.

For Canadian investors seeking ETF solutions that are dividend growth-focused, the Invesco S&P US Dividend Aristocrats ESG Index ETF (Tickers: IUAE/IUAE.F) and Vanguard U.S. Dividend Appreciation Index ETF (Tickers: VGG/VGH) provide exposure to U.S. companies that have a record of increasing dividends over time. For Canadian-focused companies, the Invesco S&P/TSX Canadian Dividend Aristocrats ESG Index ETF (Tickers: ICAE) and iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (Ticker: CDZ) will provide said exposure.

High Dividend Payers While some investors may focus on companies that consistently grow their dividends over time, others may focus on companies that offer the highest level of dividend payout. The S&P 500 High Dividend Index and S&P/TSX Composite High Dividend Index reflect this ideology, as they provide exposure to the highest dividend-paying stocks in the S&P 500 Index and S&P/TSX Composite Index, respectively. While the absolute performance of focusing on high dividend equities is strong, the investment experience it provides over a long-time frame is very different, as observed from the chart.

For Canadian investors seeking ETF solutions focused on high dividend-paying U.S. companies, the iShares U.S. High Dividend Equity Index ETF (Tickers: XHU/XHD), which tracks the Morningstar Dividend Yield Focus Index, is comprised of high quality, financially healthy stocks with attractive dividend yields. Regarding high dividend-paying Canadian companies, the Vanguard FTSE Canadian High Dividend Yield Index ETF (Ticker: VDY) tracks the FTSE Canada High Dividend Yield Index, which reflects Canadian companies characterized by high dividend yield.

Quantitative, Factor, or Thematic Dividend Strategies While pure-play dividend investing is a proven investment approach, ETF manufacturers are increasingly bringing to market divided-focused solutions that have an added quantitative, factor, or thematic component within their investment objective. For example, Bristol Gate Capital Partners Inc. employs a four-pillar process to build portfolios of the highest predicted dividend growers. The process leverages a combination of data science with fundamental analysis to help improve efficiencies, return profiles, and minimize human bias.

Presently, Bristol Gate Capital Partners Inc. has two ETF offerings: Bristol Gate Concentrated U.S. Equity (Ticker: BGU/BGU.U) and Bristol Gate Concentrated Canadian Equity ETF (Ticker: BGC). These ETFs provide exposure to the S&P500® Total Return Index and S&P/TSX Composite Total Return Index, respectively. The manager’s investment strategy results in holdings between 20 and 30 securities. Approximately every three months, subject to market conditions and manager discretion concerning specific timing, the portfolio is rebalanced so that all of the securities in the portfolio are approximately equally weighted at that time.

From a factor investing perspective, ETF manufacturers have combined low-volatility and dividend investing to create solutions capable of mitigating downside risk while benefiting from dividend-paying companies. Franklin Templeton recently launched a suite of low-volatility, dividend-focused ETFs earlier this year, which was highlighted here. From a thematic perspective, ETF solutions such as Middlefield Healthcare Dividend ETF (Ticker: MHCD) or Global X Canadian Utility Services High Dividend Index ETF (Ticker: UTIL) provide investors sectoral exposure to dividend-paying companies.

International Dividend Strategies The investment opportunity set for dividend investing also includes non-North American markets, as there are numerous international, Emerging Markets, and global equity dividend-focused ETFs. By taking a non-North American approach to dividend investing, investors increase their optionality by gaining exposure to a broader offering of companies in differing geographies and market capitalization. For example, the Purpose International Dividend Fund (Ticker: PID) utilizes a disciplined fundamental process to select the most attractive and sustainable dividend stocks from each major developed market outside North America. For investors seeking Emerging Markets equity dividend exposure, the CI Emerging Markets Dividend Index ETF (Ticker: EMV.B)holds dividend-paying stocks selected from 18 emerging market nations; companies are weighted in the Index based on annual cash dividends paid.

Finally, for globally oriented dividend investors, the Dynamic Active Global Dividend ETF (Ticker: DXG) targets companies expected to initiate or grow their dividends. It specifically focuses on large-cap companies with some exposure to mid-cap companies that are profitable, well-financed, and attractively valued. Given the manager’s active investment management strategy, the fund will have a high active share that seeks to differentiate the portfolio from the MSCI World Index.

Takeaway Many ETF solutions are available for Canadian investors interested in dividend investing. Narrowing down your selection comes down to understanding your investment objective, risk tolerance, and how additive or appropriate a particular solution is within your broader portfolio.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.

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Canada’s Guide For Dividend ETF Investing

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