Balancing Your Dividend Holdings - MoneySense

Balancing Your Dividend Holdings

One problem with the two leading Canadian dividend ETFs is that they are not very well diversified across sectors. The iShares Dow Jones Canada Select Dividend (XDV) is half banks and financials. Claymore’s S&P/TSX Canadian Dividend (CDZ) has the opposite problem: it includes none of the banks, and although it has a broader overall mix […]

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One problem with the two leading Canadian dividend ETFs is that they are not very well diversified across sectors. The iShares Dow Jones Canada Select Dividend (XDV) is half banks and financials. Claymore’s S&P/TSX Canadian Dividend (CDZ) has the opposite problem: it includes none of the banks, and although it has a broader overall mix it is 25% oil and gas stocks.

The newest Canadian dividend ETF hasn’t seemed to generate a lot of buzz, but in my opinion it tracks an index that is better than both of the incumbents. The iShares S&P/TSX Equity Income (XEI), which was launched back in April, simply selects the 75 companies in the S&P/TSX Composite Index with the highest yield, period. (If there happens to be fewer than 75 stocks with yields above the median, other rules kick in.) These companies are weighted by market cap, but no company can make up more than 5%, and no sector more than 30%.

This index avoids the problem inherent in CDZ (which had to kick out the banks because they haven’t raised their dividends for five years running) and XDV (which is hugely overweight in banks because there is no sector cap). However, it’s still very heavy in financials, energy and telecoms:

Sector XDV CDZ XEI
Financials 50% 12.7% 29.9%
Energy 13% 25% 28.3%
Materials 2% 3.1% 0.5%
Industrials 3.7% 15.7% 2.6%
Consumer Discretionary 0% 5.9% 7.7%
Telecommunications 15.5% 8.2% 19.7%
Information Technology 0% 0% 0%
Consumer Staples 4.6% 5.9% 0.6%
Utilities 10.7% 8.3% 9.7%
Health Care 0% 0% 0.5%

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Note: The CDZ website lumps together all consumer retailers in a single category. I split the 11.8% figure equally between discretionary and staples as an estimate.

Biases without borders

The fact is, no Canadian dividend ETF can get around the fact that our economy is highly concentrated in some sectors and all but absent from others. That’s why dividend-oriented investors—just like more conventional Couch Potatoes—would do well to look south of the border for some diversification. But again, the methodology that US dividend ETFs use can have a huge effect on their sector breakdown.

Take a look at these three dividend-focused ETFs. The first is the SPDR S&P Dividend ETF (SDY), which includes only companies that have grown their dividends for at least 25 years. (The brand new Claymore S&P US Dividend Growers ETF tracks the same index.) Because of its focus on mature companies, it’s very heavy on utilities, financials and consumer retailers, and light on technology and telecoms.

Contrast that with the Vanguard Dividend Appreciation ETF (VIG), which also focuses on dividend growth, but without the strict 25-year rule. It’s dramatically lighter on financials and utilities, but much more tilted to energy and industrials.

Finally, the WisdomTree Total Dividend Fund (DTD), which is fundamentally weighted. It falls in the middle of the other two with respect to financials, utilities, and energy, and has the highest weightings in telecoms, health care and technology.

Sector SDY VIG DTD
Financials 16.7% 6.3% 10.8%
Energy 3.3% 14.9% 9.9%
Materials 10.5% 6% 3.8%
Industrials 11% 20.7% 9.6%
Consumer Discretionary 10.5% 13.1% 7.2%
Telecommunications 4% 0.1% 7.3%
Information Technology 3% 6.6% 8.4%
Consumer Staples 19.9% 24.9% 16.6%
Utilities 14.9% 1.7% 8%
Health Care 6.3% 5.7% 9.9%

Complementing Canada

It should be clear that all dividend-focused indexes have built-in sector biases. But these sector biases are very different in Canada and the US. What this means is that any of the US funds listed above would go a long way toward diversifying a portfolio of Canadian divided payers.

Here’s what your sector breakdown would look like if you combined these ETFs with XEI in equal amounts. All three combinations offer a much broader mix of dividend stocks than you can get at home:

Sector XEI/SDY XEI/VIG XEI/DTD
Financials 23.3% 18.1% 20.4%
Energy 15.8% 21.6% 19.1%
Materials 5.5% 3.3% 2.2%
Industrials 6.8% 11.7% 6.1%
Consumer Discretionary 9.1% 10.4% 7.5%
Telecommunications 11.9% 9.9% 13.5%
Information Technology 1.5% 3.3% 4.2%
Consumer Staples 10.3% 12.8% 8.6%
Utilities 12.3% 5.7% 8.9%
Health Care 3.4% 3.1% 5.2%

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Disclosure: I do not own any of the ETFs discussed in this post.

 

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