Should You Buy A Dividend ETF?
It’s no secret that I like dividends. I’ve been using the dividend growth investing method for several years now and plan on collecting dividend income long after I reach retirement age.
As ETF’s have increased in popularity I have been getting more questions about buying a dividend ETF. Why spend all of that time researching individual dividend stocks when you can just buy a dividend ETF like CDZ or XDV? A dividend ETF holds a broader selection of dividend stocks according to the index it tracks.
Choosing a Dividend ETF
The two most popular dividend ETF’s in Canada are iShares XDV and Claymore’s CDZ. Let’s take a look at what each of these ETF’s are holding:
iShares XDV – This dividend ETF seeks to provide long-term capital growth by replicating the performance of the Dow Jones Canada Select Dividend Index. XDV holds 30 of the highest yielding dividend paying stocks in Canada.
XDV is heavily weighted towards the financial sector (51% of the fund), telecommunications sector (14.5% of the fund) and the oil & gas sector (13% of the fund). The top 5 holdings are CIBC, Bonterra Energy, National Bank, Bank of Montreal and TD Bank.
XDV has a management expense ratio of 0.5% and has returned 6% annually over the past 5 years. The annual dividend is $1.39, giving XDV a yield of 6.30%
Claymore’s CDZ – The dividend ETF has been designed to replicate the performance of the S&P/TSX Canadian Dividend Aristocrats Index. To qualify for the Dividend Aristocrats Index a dividend stock must have increased dividends every year for at least 5 consecutive years. At this time, CDZ holds 39 individual securities.
Because the big Canadian banks failed to raise their dividends during the financial crisis in 2008-2009, CDZ is much more diversified than XDV. The top 3 sector holdings in CDZ include the Oil & Gas sector (24%), the Industrial Products sector (17%) and the Consumer Services sector (15%). Bird Construction, Enbridge Income Fund, North West Co., Keyera Corp and AGF Management are the top 5 individual holdings.
CDZ has a management expense ratio of 0.60% and has returned 6.14% since inception of the fund (9/8/2006). The annual dividend is $0.66 and the yield is 3.10%
Dividend ETF vs. Dividend Stocks
The point of an ETF is to allow investors to track all of the stocks in an index, capturing returns from the entire market (minus fees). The problem with choosing a dividend ETF like XDV or CDZ is that their holdings are not very broad or diverse.
Both of these ETF’s have their flaws. XDV is poorly diversified, with financials, energy and telecommunications making up nearly 80% of the fund. CDZ has more diversification, but is missing some key dividend stocks due to their requirement of needing to raise dividends annually for 5 consecutive years.
I like the theory behind holding a dividend ETF, and if I were just starting out learning how to invest I would definitely purchase one or both of these funds while I built up my portfolio. But once my investment portfolio reached $50k or $60k I would start to purchase individual dividend growth stocks and replicate a dividend ETF on my own.
As it stands, my aim is to get my investment portfolio up to around 25-30 stocks. This way, I hold the securities that fit with my investment style and criteria while saving money on fees over time.
Do you own a dividend ETF, or do you prefer buying your own individual dividend stocks?
I have to agree that when starting out buying a broad ETF is great way to get exposure when you don’t have much cash. But move into individual stocks as soon as you can.
That said though, specific ETF’s are still useful later on when you want to focus on sectors or specific objectives but still don’t have enough cash to diversify within that sector.
I think you’d have to really have a lot of money to be at the point where ETF completely superfluous.
@schultzter – you’re right that specific etf’s can be very useful to diversify outside of your core portfolio. The problem now, of course, is that there is an etf for everything and investors can get a little carried away trying to diversify.
I like the ETF selection that iShares carries, but hate paying a commission every time I want to buy or sell an ETF, especially since I like dollar-cost averaging (buying a little bit at a time, consistently).
So I always shoot for commission-free ETFs, which both Schwab and Vanguard offer (and probably a lot of other brokerage houses offer as well). The selection isn’t as broad, but Vanguard has 2 dividend ETFs.
I have been considering buying one of these two ETFs as I switch over from mutual funds. Seeing that the two are substantially different, I think I will include both in my portfolio to be more diversified.
Can you tell me how you calculated the yields for both? Is it annual dividend divided by the NAV of the ETF times 100? Would one look at P/E ratio to determine if an ETF is currently overvalued or undervalued?
I am not yet confident enough to research and buy individual stocks to avoid paying MERs. Also am not far from retirement and therefore don’t have the time horizon to build a stock portfolio.
@Be’en
That’s the correct way to determine yield from the dividend ETF. Have you looked into monthly income funds? Here’s a comparison – https://boomerandecho.com/canadian-monthly-income-fund-comparison/
Thanks..
I have invested some in the TD Income Fund, but since it is a mutual fund I want to switch over to ETFs. Are there any monthly income ETFs that are worth looking at?
Gonna look into them, I’m not familiar with the specifics of ETF dividends other than company specific. I’ll have to see how their performance has held up.
I just read your column and checked the current yield for XDV and I’m really glad that I didn’t invest with them at the time you posted your article. It is currently paying a dividend of $0.39 and the yield is 1.98% !
@2Good 2B True – I’m not sure where you see that information. It looks like the fund is yielding 4% at this time.
Hmmm… I checked it on the Questrade website. Ticker XDV.TO currently trading at $19.45, with a yield of 1.98%. I also just checked on the TSX website thinking that perhaps this was incorrect but they too are showing the same yield.
http://tmx.quotemedia.com/quote.php?qm_symbol=xdv&locale=EN
Interesting. According to their website – http://ca.ishares.com/product_info/fund/distributions/XDV.htm – they have already paid out 76 cents this year, which puts them at a yield of 3.8%. When you add December’s payout, that should take them just over 80 cents for the year, or around 4% yield.
I think the company’s debt needs to be looked at before jumping into any single stock for dividends.
Dividends are always on the chopping block when times get tough.