There are two dividend ETF portfolios on Cut The Crap Investing. Many investors enjoy a dividend focus. Some investors will simply shade in a dividend ETF or two in concert with their core holdings. We’ll have a look at the dividend aristocrat portfolio and the returns for 2019.
Once again it was an incredible year in 2019. Please have a read of the returns of the core ETF portfolios on Cut The Crap Investing.
From that post …
Stock to bond ratio summary
- 100% stocks = 21.25%
- 75% stocks = 18%
- 60% stocks = 15.7%
- 40% stocks = 12.5%
It was tough to go wrong in 2019, most everything worked. Even bonds.
So how did a dividend focus fare in 2019? Keep in mind that a one-year snapshot does not tell us much. Investing is a long-term marriage. We need to stay focused on our strategy, and it can take many years even a market cycle or two for an approach to ‘do its thing’. Like marriage, we need to stay committed through thick and thin.
We can’t break up in market corrections.
The dividend aristocrats.
For a backgrounder you can have a read of this post that outlines the Canadian dividend aristocrats. The gate keeper for a dividend growth approach is that dividend growth history. Canadian companies must have increased their dividends every year for 5 years running. In the US an aristocrat must have a 25-year history of dividend increases. Now that’s dividend royalty. You will find many self directed investors devoted to those US dividend aristocrats. They will often own enough of the individual stocks.
The Canadian aristocrats have a history of outperforming the TSX Composite. But as always, past performance does not guarantee future returns.
Here’s a snapshot of the performance in the current bull run. The chart is courtesy of portfoliovisualizer.com.
The Canadian dividend aristocrats ticker CDZ is Portfolio 1.
The TSX Composite ticker XIC is Portfolio 2.
The out-performance for that period is 1.7% annual.
In 2019 CDZ offered a beat of the TSX Composite. Figures are rounded.
- Aristocrats 26%
- Composite 22.9%
The US Aristocrats.
This is supposed to be a boring stodgy grouping, but the US aristocrats have been outperforming the S&P 500 funds through the record breaking US bull market run. But many investors (myself included) own those aristocrats for the potential of lesser volatility or draw down in a major market correction. The last major market correction is a distant memory for most.
The US dividend aristocrats are offered in ETF form courtesy of ProShares and by way of the ticker NOBL. For US stock comparison we’ll use iShares S&P 500 IVV.
- NOBL 27.4%.
- IVV 31.4%
In equal weight fashion of Canadian and US Aristocrats (many would write that is not a good idea) the return for 2019 would be 24.1%. That figure would adjust for the strong Canadian dollar, up 5.1% over the US Dollar in 2019.
The dividend aristocrat portfolio – North American focus.
- Canadian Aristocrats 26%
- US Aristocrats 22.3%
- 50/50 – 24.1% CAD
Going global.
For an International addition we might use Vanguard’s VYMI. While not an aristocrat focus, the fund does offer more ‘complete’ international exposure as it includes developing markets. That is a US Dollar fund. And as an International fund it includes Canada at 7%. You’d factor that into your total geographic allocation.
- VYMI 18.7%
iShares offers an International dividend growth fund IGRO that also includes Canada. In fact, you’ll see Canada’s top 3 banks show up in the top 10 holdings. I will look into the tax considerations. That is a US dollar fund.
- IGRO 25.8%
For Canadian Dollar International dividend options you might consider BMO’s International Dividend ETF ZDI. That fund does not include Canadian holdings. That index is also available in a currency-hedged version ZDH.
- ZDI 13%
- ZDH 20.2%
For argument sake we will construct an equal weight Canada/US/International Dividend growth portfolio. Think of it as the dividend aristocrat portfolio with a twist.
- Total return 22.8%
In the above example I used the BMO ZDH.
What goes where?
Please ensure that you understand all tax considerations. And learn ‘what goes where’ with respect to account types. You may benefit from the expertise of an advice-only planner.
Thanks for reading. Please add your thoughts and suggestions in the comment section.
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Dale
I find these discussions of dividend strategies very interesting Dale. Until recently, I subscribed to the theory of the irrelevance of dividends. I still believe that investors would do well to build a core of ETFs based on broad-market indices covering the major asset classes. However, it is impossible to ignore the evidence. In the past, dividend strategies have outperformed, at least during certain periods. I think that dividend approaches can be divided into two categories: high dividend stocks and dividend growth stocks. People such the prominent author Larry Swedroe argue that regression analysis reveals exposure to the recognized factors of quality and value. Indeed, some authors maintain that dividends are not a factor. However, both iShares and BMO consider dividends part of Smart Beta. It is also worth noting that the MSCI index provider does indeed recognize dividend yield as a factor. At the moment, my strategy is to keep the bulk of my liquid assets in the cap-weighted indices, but to gradually add more exposure to dividends and quality. From my reading I have discovered that some providers replicate an index like MSCI, while others have a kind of in-house, rules-based process. I like the core-and-explore idea. One can have a solid core, but then complement it with satellite strategies. For example, one could add two dividend funds to each equity class: one index-based, the other rules-based. During some periods, one approach might outperform the other. Other periods the roles would be reversed.
Thanks David, yes many will embrace that core and explore concept. Some will criticize a dividend focus but then suggest or ‘admit’ that the dividends can find certain kinds of companies and certain kinds of factors. Sure, one could go straight to the factors if they like. But many also like having and watching the income.
The most important aspects is that we understand our portfolio construction, but in the end adopt a sensible plan that we know we can stick to like glue. We all have biases and make ‘bets’. It’s important that we understand those bets as Mike Philbrick of ReSolve Management will always remind me 🙂
Thanks, as always,
Dale