By SHIRLEY WON
Special to The Globe and Mail
Wednesday, April 24, 2019
With central banks putting the brakes on interest rates, income-seeking investors are taking a new look at strong dividend stocks.
The Bank of Canada is standing pat on rates after hiking them five times since 2017. And the U.S. Federal Reserve Board has also paused its benchmark rate this year amid economic uncertainty.
When rates rise, dividend-paying stocks can suffer as higheryielding bonds become more attractive. That threat is now on the back burner.
Because picking high-yielding stocks can be difficult - some firms may not continue juicy payouts - exchange-traded funds (ETFs) offer a more diversified way to invest in these securities.
We asked three ETF experts for top picks among dividend funds.
DANIEL STRAUS, HEAD OF ETF RESEARCH AND STRATEGY, NATIONAL BANK FINANCIAL INC., TORONTO The pick: Invesco S&P 500 High Dividend Low Volatility ETF (UHD-NEO) Management expense ratio (MER): 0.40 per cent Dividend yield: 3.5 per cent This ETF will appeal to investors who want to own strong dividend-yielding stocks with less volatility, says Mr. Straus. "The ETF attempts to deliver a higher yield than the broad market, while offering some downside protection." The low-volatility criteria can help investors avoid "dividend traps," when company payouts may not be sustainable, he adds. Top holdings include Kimco Realty Corp., Altria Group Inc. and Iron Mountain Inc. This fund can be a less-risky alternative to a regular U.S. dividend ETF, but it might also lag in rallying markets, he says. In a market downturn, however, this unhedged ETF could benefit from a rising U.S. dollar, he notes. The ETF's fee, he says, is in the middle of the pack among its peer group.
The pick: Dynamic iShares Active Global Div. ETF (DXG-TSX) MER: 0.91 per cent Dividend yield: 0 This active global equity ETF is suited to investors seeking dividend stocks for capital growth rather than yield, says Mr. Straus.
Investors can still replicate yield by selling fund units, but returns are not guaranteed. This ETF, which invests in a mutual fund run by Dynamic Funds, has an impressive record, he says. With a 24.1-per-cent annualized total return from inception in January, 2017, to March 31, it has outpaced the 10.8-per-cent gain for the MSCI World Index in Canadian dollars. This fund, which can own non-dividend stocks, targets a yearly payout but did not have one in 2018. Top holdings include Keysight Technologies Inc. and Lululemon Athletica. This ETF's fee is on the pricier side, he adds.
JAMES GAUTHIER, HEAD OF ETF AND MUTUAL FUND RESEARCH, INDUSTRIAL ALLIANCE SECURITIES INC., TORONTO The pick: BMO Canadian Dividend ETF (ZDV-TSX) MER: 0.39 per cent Dividend yield: 4.9 per cent The appeal of this Canadian dividend ETF is that its stocks are weighted equally, instead of by market value, to avoid concentration in a financial- and energyheavy market, says Mr. Gauthier.
"Another ETF in this space, for example, has a 65-per-cent weighting in financials, while the BMO ETF is 35 per cent financials." The fund offers a monthly payout and screens firms that have a threeyear dividend-growth rate and can sustain payouts. Holdings include Enbridge Inc., Sun Life Financial Inc. and BCE Inc. Dividend ETFs can still lag the broader market in tough times, he notes. In 2018, this ETF shed 10.7 per cent compared with a loss of 8.9 per cent for the S&P/TSX Composite Index, including dividends. The ETF's fee is near the low end among its peers, he adds.
The pick: BMO U.S. Dividend CAD ETF (ZDY-TSX) MER: 0.34 per cent Dividend yield: 2.8 per cent This ETF, which invests in U.S.
stocks weighted equally, targets firms offering stable and sustainable dividends as opposed to absolute yield, says Mr. Gauthier. "It can be argued that the quality of the companies in this ETF exceeds the quality of ETFs where absolute yield is the focus," he says. The fund, which has a monthly payout, tends to own firms with lower earnings volatility and good dividend growth, he adds; it could lag, however, when high-growth tech companies and resources do well. Utilities represent 15 per cent of the ETF, followed by 14 per cent each in consumer discretionary and information tech. Holdings include IBM Corp., AT&T Inc. and Abbvie Inc. The ETF's fee is near the lower end for its peer group, he adds.
ALEX BRYAN, ETF AND MUTUAL FUND ANALYST, MORNINGSTAR INC., CHICAGO The pick: iShares Core MSCI Global Quality Dividend ETF (XDG-TSX) MER: 0.22 per cent Dividend yield: 3.2 per cent This global dividend ETF is a good core holding for investors because it owns companies with above-average yields that are also high-quality firms, says Mr.
Bryan. "It's a good way of boosting yield without taking on too much risk." With high-yielding stocks, "you will [often] end up owning riskier areas of the market," he notes. This ETF, which focuses on developed markets, has a monthly payout. It filters out stocks with high payout ratios that may not be sustainable, and owns strong companies as measured by return on equity, debt to equity and earnings-growth consistency. Top sectors include health care at 19 per cent and consumer staples at 17 per cent. Holdings include Exxon Mobil Corp., Nestlé SA and Pfizer Inc. This ETF's fee is competitive with those of its peers, he adds.
The pick: Fidelity U.S. High Dividend Index ETF (FCUD-TSX) MER: Not available (management fee is 0.35 per cent) Dividend yield: N/A This ETF targets higher-yielding U.S. dividend stocks and provides broad diversification across industry sectors, says Mr. Bryan.
The strategy aims to sidestep stocks with the highest payout ratios in case they can't be sustained, he notes. Companies are compared with sector peers as well as with firms in different industries to avoid biases that can occur when focusing only on the latter, he adds. Launched last fall, this ETF has a monthly payout and tracks an index developed by Fidelity Management & Research Co. Top holdings include Dominion Energy Inc., Southern Co. and Apple Inc. Because the names have a value tilt, they could lag when growth stocks have momentum, while the fund's interest-sensitive stocks, such as utilities, could suffer when rates rise, he notes. The fee is not unreasonable but could be lower, he adds.
BCE Inc. is one of the stocks held in the BMO Canadian Dividend ETF. CHRIS YOUNG/THE CANADIAN PRESS
Top, Lululemon Athletica is one of the dividend-paying stocks held in the Dynamic iShares Active Global Dividend ETF. Above, recycled glass bottles at a Nestlé SA plant in Switzerland; Nestlé is held in the iShares Core MSCI Global Quality Dividend ETF. BRENDAN MCDERMID/REUTERS AND DENIS BALIBOUSE/REUTERS