My Own Advisor

About a year and a half ago, I wrote while dividend-investing takes some time and effort, investing in some ETF products in my opinion does not.  Investing can be rather simple – using some great Canadian Exchange Traded Funds (ETFs) in your portfolio.

Today’s post will revisit some of my content posted in September 2011 (with new material of course) focusing on some great Canadian dividend ETFs to consider.

Let’s get into it!

Don’t like to invest in stocks directly?  Want to forget trading almost for good?  No sweat, these Canadian dividend ETFs have you covered.  What are the benefits of investing in dividend ETFs?  First of all, you get many great dividend paying stocks in your portfolio; instant diversification over the active stock picker.  Second, many of these dividend ETFs charge low management fees.  Third, you get paid cold hard cash when distributions are paid monthly or quarterly depending upon the fund.

Here are some of my favourite Canadian dividends ETFs:

XDV – iShares Dow Jones Canada Select Dividend Index Fund

This ETF “seeks to provide long-term capital growth by replicating, to the extent possible, the performance of the Dow Jones Canada Select Dividend Index.”  This index is comprised of 30 high-yielding, dividend-paying Canadian companies.  If you’re not comfortable with direct stock ownership, XDV is a good consideration, with moderate fees; the management expense ratio (MER) is 0.55% and decent performance:  since inception the fund has returned about 6%.  The yield on XDV is over 4%.  Beyond the modest fee, there is one downside I see to this product – over 50% of the securities owned are in the financial sector.   For comparative purposes, the S&P/TSX Composite Index has about 30% weight in financials.  So, for your returns, as Canadian banks and life insurance companies perform so should XDV.

CDZ – iShares S&P/TSX Canadian Dividend Aristocrats Index Fund

For equities to qualify as part of this ETF, securities must “a) be common stock or income trust listed on the TSX and in the S&P Canada Broad Market Index (BMI); b) have increased ordinary cash dividends every year for 5 years, but can maintain the same dividend for a maximum of 2 consecutive years within that 5-year period; c) have a minimum C$ 300 million float-adjusted market cap.”  CDZ holds more than double the holdings of XDV and because of more active management, it costs more; the MER is almost 0.7%.  It also holds some riskier companies.  A few companies in this fund are on the verge of making some dividend cuts (e.g., AGF Management), at least I expect so.  This ETF pays monthly dividends and sports a yield around 3.5%.

VDY – Vanguard Canadian High Dividend Yield Index ETF

Thankfully for Canadian investors, Vanguard is here.  This ETF sports the lowest MER is this category, at 0.30%.  This ETF seeks to track, to the extent possible the “performance of abroad Canadian equity index that measures the investment return of common stocks of Canadian companies that are characterized by high dividend yield.”  As a young fund, the monthly distributions for VDY are not as mature or consistent as the aforementioned XDV or CDZ but this will change over time.  The only downside I see to this product, the top-10 holdings dominate it; these holdings make up over 60% of the content.

ZDV – BMO Canadian Dividend ETF

For all around performance, yield, cost and diversification, this Canadian dividend ETF is hard to beat.  The MER for this product is just a tad higher than VDY (costs 0.35%) and but it pays better than most in this space, with a monthly yield approaching 5% of late.  ZDV is constituted more closely to the weightings in the S&P/TSX Composite Index; with about 30% financials, 30% energy and 12% utilities, so it’s a more balanced product over iShares XDV or CDZ.

There are other Canadian Dividend ETFs to consider for your portfolio but these are the frontrunners in my opinion.  If you have some aversion to buying and holdings some Canadian stocks, and would rather pay a small fee to passively invest in the market, start your research with these ones above.  In future posts over the next few months I’ll highlight some other Canadian equity ETFs, some great Canadian bond ETFs and international ETFs for your portfolio.

Do you own any of these products?  Instead of dividend ETFs, do you invest in dividend paying stocks directly?

Thanks for reading and sharing this article.

Inspired by the recent “RRSP season” this post is about some Exchange Traded Funds (ETFs) and Canadian dividend paying stocks that might not win any sprints but will win the marathon that is long-term investing.  Why do I think that?  Because ETFs are some of the best in the business and less miniscule money management fees, as the market goes, so does the ETFs and your portfolio returns.  In other cases, I’ve listed some individual stocks for you to consider for your portfolio, what I consider dividend paying studs that should never stop rewarding investors over time to provide almost bond-like income.

Let’s go.

VTI in your RRSP

The Vanguard Total Stock Market Exchange Traded Fund (VTI) invests in more than 3,000 U.S. stocks.  This ETF won’t wow you with yield but based on historical data this ETF will give you long-term capital appreciation.  A hypothetical $10,000 investment in VTI ten years ago and held to today would have grown to almost $25,000.  You cannot control what the stock market will do but you can control your money management fees.  This ETF is one of the best at that.  The Management Expense Ratio (MER) is a skimpy 0.06%.  For the price and the long-term return it should generate, it’s one of the very best investments for your RRSP portfolio.

XIU in your RRSP or TFSA

The iShares S&P/TSX 60 Index Fund (XIU) seeks to provide long-term capital growth by replicating, where possible, the performance of the S&P®/TSX® 60 Index less minor fees.  This Index is comprised of 60 of the largest (by market capitalization) and most liquid securities listed on the TSX.  Like VTI, you’re not going to get huge yield (just over 3% yield) but holding this ETF should provide long-term capital appreciation.  10-year returns are close to 9%.  The MER on this product is a slim 0.18%  - to own the biggest 60 companies in Canada and avoid stock picking all together.

Any Big 5 Canadian Bank in your TFSA or unregistered account

Canadian bank stocks have offered yield and capital appreciation for investors for decades.  Personally, I like these companies for yield since I don’t see lots of capital appreciation from the Canadian financial industry in the future.  If I’m wrong, well, that’s a very nice bonus.  I suspect most investors would do well to buy any of these companies at reasonable prices and hold them until, well, forever.

• Bank of Montreal (BMO) – paid dividends since 1829.
• Bank of Nova Scotia (BNS) – paid dividends since 1832.
• TD (TD) – paid dividends since 1857.
• CIBC (CM) – paid dividends since 1868.
• Royal Bank (RY) – paid dividends since 1870.

Enbridge (ENB) in your TFSA or unregistered account

Enbridge (ENB) is responsible for the transportation and distribution of energy across North America.  From an investing standpoint Enbridge has distributed dividends for decades, almost 60 years.  Dividends have increased every year since 1996 even through the dot-com boom and bust and the recent Great Recession.

Fortis (FTS)  in your TFSA or unregistered account

Fortis (FTS) is the largest investor-owned distribution utility in Canada serving more than 2,000,000 gas and electricity customers.  Its holdings include electric utilities in five Canadian provinces and two Caribbean countries, and a natural gas utility in British Columbia.  It also owns hydroelectric generation stations in Canada, Belize and northern New York.  Fortis has increased dividends every year for almost 40 years.

Why these built to last ETFs and stocks in those particular accounts?

Canadian dividend-paying stocks receive favourable tax treatment from our government; they are eligible for the Canadian dividend tax credit if held in taxable accounts.   My plan is to place Canadian dividend paying stocks in these accounts to obtain this tax credit for those investments.  I also choose to own Canadian dividend paying stocks in my TFSA to earn tax-free dividend income.  I’ll lose the dividend tax credit doing so in the TFSA but then again, the dividends are tax-free and do not affect income tested government programs.

On the contrary, U.S. ETFs do not receive any favourable tax treatment from our Canadian government.  With U.S. ETFs in your RRSP however, you will avoid paying withholding taxes.

I recognize I’ve left out other great ETFs and Canadian companies to invest in but these are rock solid investments in my opinion that could fit into most DIY investor portfolios rather nicely.  Besides, I can’t list every great company to invest in, in one blogpost.  I need to save some content for the future.

What do you make of these choices?  Do you agree or disagree? 

What great ETFs did I leave out?  What rock-solid companies did I leave out?

Thanks for reading and sharing this article.

Thanks to a reader question, I’ll share with you the approach I took to transition out of mutual funds to Exchange Traded Funds (ETFs) and dividend stocks in my investment portfolio.  First up the reader question:

Chris asked My Own Advisor…What would be your thoughts on this?

I recall a while ago you mentioned that it would be advisable to move into ETFs and dividend stocks when the portfolio value is larger to mitigate the fees associated with it.  Do you know what or when that criteria could be met?  I’d like to transition into ETFs or individual stocks but I am unsure how to bridge the gap.

Thanks for your question Chris, hopefully the information below will give you some insight into my situation, what I did and why I did it so you could this to help make the right decision for your own situation.

When to switch?

In my opinion, there is no absolute right answer regarding how much your investment portfolio must be worth to own Exchange Traded Funds (ETFs) or individual stocks.  Your portfolio value could be $1,000, $10,000 or $100,000.  However, based on what I’ve read and the practices I’ve applied in my own portfolio, I think a transition to owning ETFs and individual stocks usually makes sense when you have at least $25,000 to invest.  I believe this is an appropriate value because diversification is essential in any well-constructed portfolio and to obtain some diversification, you’ll need to own at least a couple of ETFs or many individual stocks and to get that diversification, making trades will cost you money.

To sell out of your existing mutual funds or other financial products, you might be charged transaction fees to do so.  If you’re fortunate not to be paying fees when selling your mutual funds, you’re likely going to be charged some fees to buy ETFs and it will definitely cost you money to buy individual stocks.  As an investor, paying fees can be a portfolio killer because fees often take some time to recuperate from.  To avoid paying more fees than necessary, individual discount brokerage accounts greater than $25,000 in value or household assets usually greater than $50,000 have reduced transaction fees applied.

In my case, when I switched out of mutual funds into ETFs and dividend paying stocks a few years ago, my household assets were at a point where I qualified for $10 transactions.

As a small aside, most DIY investors I know usually don’t make any ETF or stock purchases until their commission costs are about 1% or less for the transaction.  That means they have saved up at least $1,000 or more to buy an ETF or stock with a $10 transaction fee.

Starting your do-it-yourself ETF portfolio can be easier than you think, and with a handful of ETFs, it can be diversified right from the start.  Here are some ETFs I like because they provide diversification across many asset classes and they charge you modest and in some cases cheap money management fees once you own them.

Owning dividend paying stocks for the long-run is another excellent strategy for wealth creation but based on the diversification reasoning above, it’s hard to achieve with a small portfolio value under $25,000.  Sure, you could own $1,000 of every Canadian bank, a few Canadian telecommunications companies, pipelines, utilities and energy companies as well but it will cost you a bunch of transaction fees to build that portfolio.  Even with those companies, you’re still missing out.  Canada only represents something like 2-4% of the entire global equity market.  Even with all these Canadian stocks in your portfolio, you’re only getting a slice of the portfolio pie; you’ll need to look to the U.S. and beyond for more equity diversification.

With only a few exceptions, I waited until I had a core portfolio of at least three broad-market ETFs from Canada and the U.S. before I started investing in individual dividend paying stocks.  Since those early purchases, as my portfolio value and investing knowledge grew, I took new monies saved each year and purchased individual stocks to buy and hold in various accounts.  Today, I continue this approach and now own around 30 individual companies along with ETFs that are at the core of my investment portfolio.   The way I see it, owning ETFs along with dividend paying stocks is a winning combination for me and my investing objectives.

You need to decide what’s right for you.

The Summary

If your portfolio value is over $25,000 or your household assets are approaching $50,000, it might be time to start researching some great ETFs and/or some dividend paying stocks to own instead of your mutual funds.  ETFs can be excellent products for index investors who want market-returns or those investors seeking to keep their portfolios simple and easy to maintain over time.   Owning individual stocks, especially those that pay regular dividends, is also a wealth-building strategy but one must be more careful with this strategy over indexing.  There are never guarantees in owning any one company no matter how long it has paid dividends.

Got a question for My Own Advisor?   Email me via my Contact page.

Thanks for reading and sharing this article.

Every week, I receive many requests and questions from readers in my inbox.

Thanks for those by the way and keep those questions coming folks.

One of the more frequent questions to My Own Advisor is:

Why don’t you just buy and hold a dividend ETF instead of individual stocks?

Good question.

Before I provide you with my answer, a bit about dividend ETFs and why I do like them.

Why dividend ETFs are great

First of all, like many other ETFs, I like the transparency dividend ETFs provide.  Within a few clicks of a mouse, I can see what every single holding is in each of these popular products:

iShares Dow Jones Canada Select Dividend ETF (XDV)

iShares S&P/TSX Canadian Dividend Aristocrats Index Fund (CDZ)

BMO Canadian Dividend ETF (ZDV)

Horizons Dividend ETF (HAL)

The high transparency of dividend ETFs certainly trumps the “black box” approach to many other investment products.

Secondly, I like dividend ETFs because of their moderate management fees.  The fact is, dividend ETFs are cheaper than most if not all, actively managed dividend mutual funds, at least the ones I can find.  Many mutual funds buy and sell stocks frequently in an attempt to beat the market. Buying and selling frequently incurs costs, and those portfolio costs are passed on to you. Instead of all this trading, investors can simply focus on buying and holding an ETF to follow a dividend index or a benchmark index like the S&P/TSX Composite Total Return Index.  Many dividend ETFs have management fees in the neighbourhood of 0.60%.  Compare that to TD Dividend Growth Fund (at just over 2% as of December 2011) and RBC Canadian Dividend Fund (at about 1.8% management expense ratio (MER)), and you’re saving a bunch of money in management fees.  Good on you to do so.

Thirdly, dividend ETFs are low effort.  If you’re going to invest in individual stocks, you need to spend some time understanding these companies.  I read annual reports and follow metrics like yield, payout ratio, earnings per share, cash flow and company debt to name a few.  Buying stocks means another investor is selling this company so you need to make time to understand what you are buying and when.  Dividend ETFs don’t have this complexity.

Why I prefer individual dividend paying stocks

All this said, dividend ETFs are great products but there are a few reasons why I prefer to own stocks directly where I can, and I intend to buy and hold many more of them in my investing future.

First of all, some dividend ETFs have specific criteria and measure some constructed indexes I don’t fully agree with.  For example, the iShares S&P/TSX Canadian Dividend Aristocrats Index Fund (CDZ) “has been designed to replicate the performance of the S&P/TSX Canadian Dividend Aristocrats Index®”.   For a company to qualify as a holding in this product, the company must have increased their ordinary cash dividend every year for at least five consecutive years, among other criteria as well.  This is sound criteria but it also means some stellar Canadian companies that have great histories of paying dividends are not included in this product.  Bank of Montreal is just one example that comes to mind.  BMO has been paying dividends every year, uninterrupted, since 1829.  Therefore, while CDZ has some great companies in it, it does tend to leave a few solid companies out.

Secondly, as a consequence of the management criteria; these products are designed and marketed to investors after all, so not all dividend ETFs are created equal.  To meet my investment objectives I would need to own a couple dividend ETFs to get what I want.  For example, XDV is particularly weighted in Canadian financials; to the tune of almost 55% of its holdings. That’s a bit too much bias in this sector for me.  It might be wise to offset this ETF with another, like CDZ or HAL to balance things out.  Given this, I might as well own XIU for the diversification and the ultra low management fee, 0.18% MER.  Actually, I do own it.

Thirdly, on the topic of fees, I save money. By owning individual dividend paying stocks instead of just dividend ETFs, I don’t pay management fees.  Yes, I miss the low-cost, built-in diversification with ETFs but if you get the point of owning 25+ dividend paying companies in Canada, maybe some of the same ones listed in the popular dividend ETFs like XDV and CDZ, you’re indexing by proxy at this point and you can forget the 0.60% or more MER.  Within the next 5 years, I hope to have my own dividend index of over 30 Canadian companies.  I’m over halfway there.

Fourth and finally, I control the portfolio and the portfolio turnover.  My long term goal is to grow my dividend stock portfolio to the point where I can live off part of the income in retirement, with many investments across many industries.  I’ve been on this journey for a few years now and the progress is starting to show.  By owning individual stocks, I’m in control of the portfolio.  I can weight the companies however I wish.  By choosing a dividend ETF, I would not have as much control because these products often weight their holdings by market capitalization and have predefined turnover periods; the reconstitution is done for me so I wouldn’t know how many companies I will indirectly own until the ETF is rebalanced.  Another benefit, I can take advantage of the discounts these companies provide for dividend reinvestments (DRIPs).  Believe it or not, many established Canadian dividend paying companies provide you with a discount for DRIPping shares, some up to 5%.  Check this out for proof.

In closing, dividend ETFs are great but they are not perfect, they are financial products and all products have flaws.  I’ll never be able to replicate the indexes, which is why I will always have a two-pronged approach to manage my portfolio, owning some broad market, low-cost ETFs and some dividend paying stocks.  This way, I feel I’m getting the best of both worlds.

Thanks to all the readers who have emailed me this question…I hope I have provided you with an answer.

Comments on my reasoning?  Comments on comments?  Have a question for My Own Advisor?  Fire away and maybe, your question will be part of a future blogpost!

Thanks for reading and sharing this article.

 

For folks who have followed My Own Advisor for some time, you might already know that I employ a two-pronged approach to grow my retirement portfolio across various accounts.

One approach is using dividend paying stocks from both Canada and the U.S.  From the companies I own I get steady income and some capital appreciation.  Some of my holdings include Canadian banks, pipelines, insurance companies and telecommunications companies.  I also own some U.S. dividend aristocrats.

My other approach is using broad market Exchange Traded Funds (ETFs) for passive investing.  From these ETFs I receive market returns less miniscle fees.  Some of my holdings include iShares S&P/TSX 60 Index Fund (XIU) and Vanguard MSCI Emerging Markets ETF (VWO).  After reading various articles about index investing over the last few years, I’ve cemented a few top reasons why ETFs work for me beyond market diversification and market returns.   Here are the others…

Low Costs

Fact:  Index ETFs are cheaper than most actively managed mutual funds. Many mutual funds buy and sell stocks frequently in an attempt to beat the market.  Buying and selling frequently incurs costs.  Instead of all this speculation, index investors can simply focus on buying and holding broad market ETFs and leave them alone for months on end.  Many Canadian equity mutual funds have management expense ratios (MERs) over 2%.  Many Canadian equity indexed products charge less than 0.50%.  This means a mutual fund manager has to beat these indexed products by more than 1.5% just to break even.  Good luck to them.

Gotta like inexpensive.

High Transparency

Fact:  Many mutual funds report their top-10 holdings but not much else.  The unfortunate part of this is; you are never entirely sure what you own with many actively managed mutual funds.  Instead of head scratching to figure out what you actually own, many indexed ETFs are built on a model of simplicity and transparency.  Want to know what the holdings of XIU are?  Click here.

Gotta like simple.

Low Effort

Fact:  If you invest in stocks you need to spend some time understanding these companies.  At least you should.  I read annual reports, news briefs and follow metrics like yield, payout ratio, earnings per share, cash flow and company debt to name a few.  The reality is if you’re buying a stock, somebody is selling it.  Buying stocks means I’m competing against other investors.  I will hopefully win at this game by holding the stock longer than most, collecting rising dividend income over time and capturing some capital appreciation in the process.  Indexed ETFs don’t have this effort, not even close.  With broad market indexed ETFs and a combination of them in your portfolio, you’ll get whatever returns the markets provide less miniscule fees.  This will give you more time to do other fun things.

Gotta like easy.

Diversified, market returns and throw in inexpensive, simple and easy for good measure.

You don’t hear those buzzwords when it comes to investing very often do you?

Are you investing with index ETFs?  If so, which ones?  If not, why not and what are you waiting for?

Thanks for reading and sharing this article.