Checking in on the Canadian Dividend ETFs and the benchmarks.

Many investors seek the comfort of the dividend payments. They like to see that dividend, that cash flow, land in their account. And as I’ve pointed out in past articles, the dividend can also be a divining rod that finds profitability and past business success. It can even find greater total returns over time. That was discussed in a past Weekend Reads post – Putting an end to the dividend debate. But certainly, investment strategies can take considerable time to play out. Today we’re checking in on Canadian Dividend ETFs in the market correction and incredible recovery.

Dividends get cut in major stock market corrections and in bear markets. Of course, we still don’t know if we’ve had a quick correction, or if this is the beginning of a bear market. I’d like to hazard a guess but the stock markets are just downright silly these past few months. We’ve never had a recession without a stock market drop that at least takes a few years to settle out. But hey, there’s a first time for everything.

Usually these things take years.

In the last recession it took several years for the S&P 500 to recover from its pre-recession peak. In the dot-com bust it took more than a decade. No one knows what will happen this time. Be prepared is all.

We first checked in with the Canadian Dividend ETFs in April. There were estimates that we could see dividend reductions in the neighbourhood of 20% or more. There have been many dividend cuts for Canadian stocks. But certainly the pace of cuts has slowed. Mathieu Latalien has been keeping score of Canadian dividend cuts at stocktrades.ca.

Here’s the link – Canadian Companies That Cut Their Dividends.

We had shut down many sectors. But we are now in the early stages of an economic restart. Perhaps and hopefully, the pace of cuts will continue to slow. As a sign of weakness those dividend cuts can have a massive impact on share prices.

From that April blog post here was the performance for the first quarter for the leading Canadian Dividend ETFs. We see the broader market benchmark as well.

The first quarter Dividend ETF scorecard.

• -19.4% Vanguard Canadian High Dividend
• -20.0% Horizons Active Dividend
• -20.4% iShares Select Dividend
• -21.0% iShares Composite TSX
• -21.4% CI First Asset Dividend
• -21.8% iShares Quality Dividend
• -22.0% Invesco Canadian Dividend
• -22.2% RBC Quant Leaders
• -25.0% BMO Canadian Dividend
• -27.4%% iShares Composite High Dividend
• -28.2% iShares Canadian Dividend Aristocrats

It’s about sector exposure.

The sectors that continued to operate in our self-imposed lockdown were Consumer Staples, Grocers, some Healthcare, Utilities , Technology (including Communication Services), Financials and some Transportation. In this survival mode we needed to eat, drink, sleep, keep the lights on, get our medications and get some sunshine.

Now that we are reopening the economy we will see more retail and restaurants being allowed to open their doors. Success will depend on the consumer and the continued taming of the virus.

Those forward thinking markets have priced in a successful economic restart. Optimism rules. Year to date the TSX 60 XIU is down just 4% . Over the last year that ETF is up some 2%.

The full drawdown (top to bottom) was almost 40%.

The Canadian Dividend Update.

One common theme is that the big juicy dividend ETFs got smacked. The bigger dividend payers ended up with a larger drawdown and a lesser recovery.

You’ll find Vanguard’s High Dividend VDY, iShares Quality ETF XDIV, iShares High Dividend XEI and BMO’s ZDV are among the laggards in total return over the last year from June of 2019 to end of May 2020.

We’ll pick on iShares XEI as the poster child for the juicy dividend under performance.

XEI is Portfolio 1.

XIU is the benchmark.

Once again the period ends May 31. The market and the dividend ETFs have continued to add gains in June.

We see this total return under performance with the Tangerine Dividend Portfolio as well. I’ll be back soon with a look at the Tangerine Portfolio offerings next week.

But keep in mind that investors may be looking for those generous dividend payments and for longer term dividend health. We just received a near $600 (monthly) dividend payment in one of my wife’s accounts. She holds Vanguard’s VDY. That was one of the more generous payments ever delivered for that investment.

I’ll certainly keep track of the dividend health for the Canadian Dividend ETFs and for those broad market benchmarks. These are early days. Perhaps we are in the first or second inning.

As an equal-weight grouping the top 10 dividend ETFs are down 10% to end of May, much more than market of course. iShares’ broad market XIC was down just 2.3% for the period. The main reason for that under performance is the stellar performance of the Canadian tech darling Shopify. That is a company with incredible growth but no earnings. You won’t see that company showing up in any dividend fund any time soon.

Thanks to this table from Scott Barlow. It shows Shopify and some gold and precious metals miners running the show. I like Gold, and I’ve been adding in our accounts.

But when it comes to stocks I mostly prefer earnings and dividends.

Related post – The new balanced portfolio.

Here’s the Shopify effect.

The best performing Canadian Dividend ETFs

I am not surprised to see Horizons’ actively managed ETF HAL lead the way. Courtesy of portfoliovisualizer.com here are the 1-year returns to end of May 2020.

Not only is Horizons HAL actively manged, the fund uses Artificial Intelligence in concert with that human intelligence and consideration.

We also see the CI active fund in the running. Close behind is the RBC Quant Fund that uses a multi-factor approach. Keep in mind that the CI fund is ‘cheating’ with some very good US picks thrown into the mix.

Ranking for the one year period to end of May.

• Horizons Active Dividend
• CI First Asset Dividend
• RBC Quant Leaders
• Vanguard Canadian High Dividend
• iShares Select Dividend
• iShares Quality Dividend
• Invesco Canadian Dividend
• iShares Canadian Dividend Aristocrats
• BMO Canadian Dividend
• iShares Composite High Dividend

The July update.

The stock market continues to run in Canada and the US. And certainly dividend funds continue to lag the core large cap index funds. They can’t keep up with the tech growth stocks, typically known as FAANG plus Microsoft in the US. The Canadian tech sector is dominated by Shopify. That wonderful success story is now driving the Canadian stock market returns to an even greater degree. Gold stocks are having a great run.

I cover tech and gold in my latest MoneySense post.

Here’s the returns of the Canadian Dividend ETFs for 2020 to the end of July.

All funds lag the TSX Composite that is down just 3.3% for the period.

Here’s the returns of the Canadian Dividend ETFs for a one year period – August of 2019 to end of July 2020.

Here’s the returns for a one year period – October 2019 to end of September 2020. For this period, the Canadian TSX Composite (XIC) is even.

In the above table, we see that the CI First Asset Active ETF is ‘in the lead’. But keep in mind, that fund ‘cheats’ with a 30% allocation to US stocks.

The returns over 5 plus years.

And here’s the returns from January of 2015 to end of September 2020. I’ve removed iShares XDIV due to its 2017 inception date.

The TSX Composite returned 4.8% annual for the period. The outperformance of the Canadian market over the dividend ETFs is largely due to the incredible performance of Shopify and other techs, plus materials stocks (gold and precious metals), and railways – Canadian National and Canadian Pacific.

Remember that we need to be patient with our strategies. It can take a long period for things to ‘work out’. That said, you may be more than comfortable with the generous income stream.

These days the stocks markets are obsessed with growth. It’s important to know why an investment might be underperforming a core benchmark.

What is the market telling us?

Stocks that hold up better than market simply have the confidence (or more confidence) assigned by the market makers. Mr. and Ms. Market feel these companies hold the potential to hold up better in these challenging economic times. Of course their collective guess is forward thinking and they will all have a different guess. The stock market prices are now being affected as much by actual results (we’ve had a couple of quarters of financial reports) as well as projections or estimates.

Dividend growth might be more than a challenge over the next year or two. And that dividend health and growth may remain a priority for many investors.

Many investors embrace the dividend route. More investors stick to the core large cap approach. I recently reported that the traditional Balanced Portfolio barely felt a thing in this crisis.

I was also happy to report that with our 24 Canadian and US dividend stocks, we have experienced no dividend cuts and were treated to many dividend increases from March. In October 2020, that perfect record is still intact.

See you in the comment section.

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