Over the 12 months to Feb. 28, the $1.1-billion iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (CDZ-T) delivered a total return of 21 per cent. Frankly, it’s hard to complain about results like this. But, then again, the $1.8-billion Vanguard FTSE Canadian High Dividend Yield Index ETF (VDY-T) made 36.4 per cent over the past 12 months, the $968-million Invesco Canadian Dividend Index ETF (PDC-T) made 31.7 per cent and the $897-million BMO Canadian Dividend ETF (ZDV) made 29.3 per cent.
A divide has opened up between the total return of dividend ETFs, and it results from what’s in their respective portfolios, specifically exposure to hot sectors like energy and financials.
Energy is an iffy long-term prospect for dividend funds because stocks in the sector raise and lower dividends according to the price of oil and natural gas. With oil prices soaring, the S&P/TSX Capped Energy Index was up 95 per cent for the 12 months to Feb. 28. Meanwhile, the financials index jumped 31.5 per cent.
CDZ does have exposure to financials and energy - weightings of 24 and 14 per cent, respectively. But VDY has a lot more, with a whopping 57 per cent in financials and 24 per cent in energy. Another dividend fund that has done well off financials in particular is a stablemate of CDZ - the iShares Canadian Select Dividend Index ETF (XDV-T), with 56 per cent of its portfolio in banks, insurers and other financial players (and 4.6 per cent in energy). The one-year return for XDV is 30 per cent.
CDZ is not alone in suffering from lesser exposure to financials and energy. The $383-million CI WisdomTree Canada Quality Dividend Growth Index ETF (DGRC-T) has a combined allotment to both sectors of 24 per cent. The one-year return for this fund is 16.5 per cent.
From a diversification point of view, CDZ and DGRC may just have a more appealing portfolio mix than VDY and XDV. Canadian investors often have plenty of exposure to the financial sector through equity, preferred share and even corporate bond funds, and the bottom can quickly fall out of energy. Over the next five years, it’s possible to imagine CDZ and DGRC having better total returns than less diversified competitors.
But for now, banks and oil companies are huge drivers of performance in the dividend ETF world. The more your fund has, the better its returns have likely been.
-- Rob Carrick, personal finance columnist
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Stocks to ponder
Mullen Group Limited (MTL-T) This transportation and energy services stock offers a 4.6% dividend yield and may be on the verge of breaking out to the upside, based on technical indicators. Year-to-date, the share price is up 13 per cent - a top performer in the S&P/TSX Industrials sector - and the average 12-month target price suggests the stock price has an additional 19-per-cent upside potential. It has a strong balance sheet and its share repurchases are providing some downside support. Jennifer Dowty looks at the investment case.
Kinross Gold Corp. (K-T) Shares have been rallying over the past five weeks – a curious turn given that the Canadian gold producer has sidelined its operations in Russia and analysts have slashed their profit expectations. David Berman looks at why investors may be believing that Kinross has now become a more valuable stock.
The Rundown
After an uncertain first quarter, here’s where investors should be putting their money
The first quarter is in the books and, judging by the results, investors are uncertain about the present and worried about the future. So, what happens now? Gordon Pape offers some predictions and investment ideas.
Amid mixed signals of a recession, only one message is clear: Brace for turbulence
The inversion of the U.S. bond yield curve last week has prompted a lot of market talk that a recession is just around the corner. But should investors really be worried? Ian McGugan, who’s been pondering his own ‘nephew indicator’, shares his perspective.
What $58-billion BMO money manager Sadiq Adatia has been buying and selling
Sadiq Adatia, the chief investment officer at BMO Global Asset Management, says the past couple of years has been a lesson in diversification for long-term investors. He points to technology stocks, which surged after pandemic lockdowns forced people online. More recently, rising inflation and Russia’s invasion of Ukraine sent commodity prices soaring. Brenda Bouw finds out what he’s been buying and selling lately in anticipation of what’s ahead.
John Heinzl’s model portfolio keeps serving up dividend hikes
Five stocks in John Heinzl’s dividend growth portfolio of 20 companies hiked their payouts in the first quarter, and capital growth has been favourable as well. Here’s his review of the portfolio’s returns and where he’s spending the cash that’s been accumulating.
On finding surprisingly good financial advice on Reddit, of all places
Freelance technology culture columnist Navneet Alang writes on why Reddit can be surprisingly useful when it comes to investing and personal finance advice.
Others (for subscribers)
Monday’s analyst upgrades and downgrades
Monday’s Insider Report: Jim Pattison invests $18-million after a dividend hike and special dividend announcement
Globe Advisor
ETFs for investing in the rebound of travel
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Ask Globe Investor
Question: In the current inflation environment, are real return bond fund such as the Phillips, Hager & North Inflation-Linked Bond Fund good protection against inflation? - Jacques B.
Answer: This fund invests primarily in a portfolio of real return and inflation-linked bonds issued or guaranteed by the Canadian government. Technically, it could also buy foreign government and corporate bonds, but right now all the money is in Canada.
The fund was launched in June 2009. During most of the years since, inflation was very low, so it’s not surprising that the average annual compound rate of return since inception is a modest 4.6 per cent.
But it may come as a surprise that over 12 months to Feb. 28, while inflation was gathering strength, this fund posted a gain of only 0.5 per cent. In February, with inflation climbing, this fund dropped 0.2 per cent.
It’s not just this fund that’s struggling. The iShares Canadian Real Return Bond Index ETF (XRB-T) was down 9.4 per cent for 2022, as of March 24.
Why aren’t these real return bond funds working in the face of the worst inflation we’ve seen in decades? Because the underlying bonds have long maturities – an average of 17.18 years for XRB – and pay a very low return after discounting for inflation adjustments. For the iShares ETF, the real yield (the return adjusted for the effects of inflation) is 0.49 per cent. Would you want to tie up your money for more than 17 years for that rate of return?
Real return bond funds give the appearance of being a solution to the inflation problem. As the results show, they’re not.
--Gordon Pape
What’s up in the days ahead
One of Gordon Pape’s most profitable investment decisions was made during the inflation-crazy 1970s. He’ll return later this week with thoughts on how markets may be setting up for a similar opportunity over the next few years.
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Compiled by Globe Investor Staff