At lunch the other day, a friend asked: “Where is this market going?”
He went on to explain he has two portfolios. One is conservatively invested to provide current cash flow for his family. The other is invested in long-term growth stocks.
“In that case,” I replied, “the market is going up. And it’s going down.”
In short, a two-tiered market – but the flip side of the one we’ve been experiencing.
We’ve been living with a two-tier stock market for at least two years. The tech sector has been driving growth stocks higher. The rest of the market has been muddling along at around break even.
There are exceptions, of course. But that’s the big picture.
Now we’re seeing a reversal of that. Dividend stocks, which were hit hard when interest rates were rising, are making a comeback. The S&P/TSX Capped Utilities Index gained 22.8 per cent between mid-April and Oct. 1. The Capped REIT Index is up 24.2 per cent since late June. The Capped Financials Index is ahead 21.3 per cent since late February.
The main driver of these gains has been interest-rate cuts – anticipated and real. With more easing likely, these sectors should continue to rise in the coming months.
If you don’t have many dividend stocks in your portfolio, the easiest way to take advantage of this market shift and get immediate diversification is by using ETFs. Here are updates on three dividend funds I have recommended in my Internet Wealth Builder newsletter. Each has its own distinctive approach, so think carefully about which best fits your needs.
SPDR S&P Dividend ETF
Originally recommended on April 9, 2012, at US$56.33. Closed Friday at US$140.86.
Ticker: SDY-A
Background: This ETF from State Street Global Advisors tracks the S&P High Yield Aristocrats Dividend Index. It includes U.S. companies that have increased their dividends annually for at least the past 20 years.
Performance: The fund was hit hard at the start of the pandemic in March, 2020, but has been moving higher since. The past year has been exceptionally strong.
Key metrics: This is a huge fund, with US$21.6-billion in assets under management. It has been in existence since late 2005 and has generated an average annual return of 9 per cent since its launch. Over the five years to Aug. 31, the average annual return was 10.15 per cent. The one-year gain was 17.53 per cent. The expense ratio is a reasonable 0.35 per cent.
Portfolio: The portfolio has 133 holdings and is very well balanced by sector, led by industrials (18.71 per cent), consumer staples (18.42 per cent), utilities (16.62 per cent) and financials (10.78 per cent).
Top positions include Realty Income Corp., IBM, AbbVie Inc., Southern Co., and Chevron Corp.
Distributions: These are paid quarterly and will vary. Over the past year, investors received US$4.115 in payouts for a trailing 12-month yield of 2.9 per cent.
Summary: Falling interest rates should continue to spur growth here.
iShares S&P/TSX Canadian Dividend Aristocrats Index ETF
Originally recommended on April 9, 2012, at $22.29. Closed Friday at $35.76.
Ticker: CDZ-T
Background: This passively managed ETF replicates the S&P/TSX Canadian Dividend Aristocrats Index, which is composed of large companies that have increased their dividends in each of the past five years at a minimum.
Performance: The fund has a total return of 18.42 per cent year-to-date (Oct. 3) and a five-year average annual compound rate of return of 9.45 per cent.
Key metrics: This ETF is medium-risk and has $957-million in assets under management. It was launched in September, 2006, and has an MER of 0.66 per cent.
Portfolio: All 91 holdings are Canadian, with financials (30.39 per cent), energy (11.1 per cent) and industrials (10.37 per cent) the dominant sectors. The positions are evenly balanced, with no one stock accounting for more than 2.96 per cent of the total assets. The top three holdings are Fiera Capital Corp., TC Energy Corp. and Allied Properties REIT.
Distributions: Payments are made monthly and are currently pegged at 11.2 cents per unit ($1.344 a year). The projected forward 12-month yield at that level is 3.8 per cent.
Summary: Expect above-average returns as long as rates keep dropping.
iShares Core MSCI Canadian Quality Dividend Index ETF
Originally recommended on Jan. 15, 2024, at $25.64. Closed Friday at $29.85.
Ticker: XDIV-T
Background: This ETF invests in a portfolio of Canadian dividend stocks with strong overall financials, including solid balance sheets and less volatile earnings. It is a more concentrated fund than CDZ.
Performance: The fund, which was recommended in mid-January, is up about 20 per cent year-to-date.
Key metrics: The fund was launched in June, 2017, and has almost $1.7-billion in assets under management. The MER is a low 0.11 per cent.
Portfolio: This is a tightly focused portfolio, with only 19 holdings. This means bigger bets on each stock, which translates to greater return potential but higher risk. Offsetting that is the fact all the holdings are the bluest of Canadian blue chips. Top positions are Manulife Financial Corp. (9.52 per cent of the portfolio), Sun Life Financial Inc. (9.32 per cent), Royal Bank of Canada (9.25 per cent), Toronto-Dominion Bank (9.01 per cent) and Enbridge Inc. (8.85 per cent).
Distributions: They are paid monthly and are currently running at 10.6 cents per unit ($1.272 annually). The forward yield is 4.3 per cent at the current price.
Summary: This fund should deliver superior returns over the next year. The blue-chip nature of the portfolio offers some downside protection.
Gordon Pape is the editor and publisher of the Internet Wealth Builder and Income Investor newsletters.
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