A most shocking investing development this year is the flagellation of formerly loved dividend stocks.
The S&P/TSX 60 index recently included three stocks with yields in the 7 per cent zone, five around 6 per cent and another four or so in the area of 5 per cent. These exceptionally high yields reflect high interest rates that make bonds and term deposits seem a reasonable alternative.
But high yields also indicate investor concerns about whether companies can deliver growth to shareholders and increase the dividend. Even maintaining the dividend may be in question, A suggestion for investors feeling nervous about jumping on high-yielding stocks: Consider a high-yield dividend exchange-traded fund.
Dividend ETFs are built on portfolios of dozens of dividend-paying stocks, which means you’re better diversified than the typical retail investor’s portfolio. These funds differ in their mission - some put more of an emphasis on growth and thus hold stocks with lower yields. Others put more of a premium on delivering dividend income.
Here are a few dividend ETFs that had distribution yields of 5 per cent or more in late September based on the latest monthly distributions:
-Horizons Cdn High Dividend Index ETF (HXH-T): A yield around 5.2 per cent in late September based on a portfolio of roughly 40 stocks. The management expense ratio is 0.11 per cent, which is exemplary for the dividend ETF category.
-iShares Canadian Select Dividend Index ETF (XDV-T) A yield of 5 per cent from a tight portfolio of 30 stocks. The MER is 0.55 per cent, which is a lot for an index-tracking ETF.
-iShares S&P/TSX Composite High Dividend Index ETF (XEI-T): A yield of 5.3 per cent from a portfolio of 75 stocks. The MER is a more reasonable 0.22 per cent.
-Invesco Canadian Dividend Index ETF (PDC-T): The 45-stock portfolio delivers a yield of 5.15 per cent, and the MER is 0.54 per cent.
These ETFs were drawn from a longer list contained in the Canadian dividend ETF installment of the 2023 Globe and Mail ETF Buyer’s Guide. When researching dividend ETFs, a few points to consider beyond MER and yield are:
-Total returns: How does the fund compare to its peers on the combination of share price gains and dividend income? Published ETF returns reflect these total returns.
-Dividend growth: Check to see if rising dividends from companies in the portfolio are reflected in rising monthly distributions over the years.
-Sector concentration: Many dividend ETFs are loaded with bank stocks, and some have a lot of energy exposure. See how this meshes with the rest of your portfolio.
-Tax: Investors holding their dividend ETFs in non-registered accounts will want to ensure the vast majority of their distributions are dividends eligible for the dividend tax credit. A little return of capital is normal.
-- Rob Carrick, personal finance columnist
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Stocks to ponder
Fortis Inc. (FTS-T) When it comes to investing, there is one thing that’s virtually certain: Shareholders of this Canadian utility will get a dividend increase every year. It came through again on Sept. 19 with a 4.4-per-cent dividend hike. That translates into a yield of about 4.6 per cent. In a world full of turmoil and uncertainty, Fortis has been a model of consistency. One analyst is even calling it “a cornerstone holding for investors seeking defensive exposure.” But Fortis also knows how to play offence. Our dividend growth investor, John Heinzl, explains why he’s buying more shares. And for an update on his model dividend growth portfolio, click here.
The Rundown
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Also see:
U.S. bond market signals the end of an era
Hedge funds using algorithms to sell up to US$30-billion of stocks soon: UBS
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Others (for subscribers)
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The most oversold and overbought stocks on the TSX
Monday’s Insider Report: CEO tops up his investment in this leading gas producer
Monday’s analyst upgrades and downgrades
Ted Dixon: Insiders buy as Whitecap Resources rallies and boosts dividend
Globe Advisor
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What’s up in the days ahead
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Compiled by Globe Investor Staff