Big Canadian dividends are having their way.

Many Canadian self-directed investors love dividend stocks. And they mostly love their Canadian dividend stocks that pay big juicy dividends. And those big dividend payers have a very nice history of increasing dividends as well. That dividend growth can be in the area of 8% or more. Who doesn’t like an 8% annual raise? Add in compounding from reinvested dividends and we get that dividend growth machine. Historically the ‘chasing’ of dividends does not hamper the total return potential. In fact, the Beat The TSX Portfolio approach shows us that the big dividends have a very nice historical beat to ‘the market’. And while they took a hit in the early stages of the pandemic, the big Canadian dividends are back to having their way.

In this post I had a look at the Canadian Dividend ETFs in 2020. They underperformed the Canadian stock market as represented by the TSX Composite (XIC).

From that Canadian Dividend ETFs post.

The TSX Composite ETF iShares XIC was up by 5.6% in 2020, largely driven by Shopify and a few other non-dividend-paying names.

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Earnings matter. Value can matter

As I suggested in that post …

And yes, the higher yielding dividend ETFs are fighting back and closing the gap. We’ve seen a switch to value stocks leading the surge after positive vaccine results in November and vaccine approvals in December. Many of the harder hit stocks might hold greater value. The generous dividend payers often offer greater current profits and juicy dividends that can be employed for reinvestment.

That hunch or suggestion has come to fruition. Earnings and valuations are starting to matter more in 2021 as fears of inflation and a long-in-the-tooth bull market run weighs on considerations.

In August of last year we noticed that it was a wonderful time to invest in the Canadian banks. It was the cheapest that Canadian banks had been in 20 years. The rate of return for the banks compared to the market is about 50% greater from the time of that post.

The big Canadian dividends are having their way, and Vanguard’s High Dividend ETF VDY is leading the way. We hold that ETF in one of my wife’s retirement accounts. She also holds the (superior to XIC) TSX 60 XIU that you’ll find in the Core ETF Portfolios.

Here’s the returns comparison (in percentages) for VDY vs XIC to September, 2021. The returns are average annual for 3-year and 5-year and include dividend reinvestment.

Even from inception, VDY had been a superior index compared to the Canadian market. Thought admittedly it carries that concentration risk. It is 58% financials and almost 23% energy. The fact that those sectors can be inflation friendly is also playing into the outperformance.

The Canadian market, not well diversified

That said, the Canadian stock market as a whole is not very well diversified. VDY stretches things a bit further but finds those very profitable, and bluest of the blue chip stocks.

It is a cousin in many ways to the Beat The TSX Portfolio. Big deep blue dividend payers with wide moats. In that post you’ll see the market-beating history. And given that suggestion, this is a good time to remind you that ‘past performance does not guarantee future returns’.

I checked the other dividend ETFs, VDY appears to be leading the pack. If you see that differently, please let me know.

VDY vs the Canadian Wide Moat 7

While my personal Beat The TSX approach (Wide Moat 7) has outperformed VDY from VDY’s 2013 inception, VDY is teaching the WM7 a lesson in 2021 and over the last 5 years and more.

We’ll start with $1,000,000 today, I’m feeling generous.

That fund is well-positioned for the times with some meaningful energy-producers in the mix. The has been the top performing sub sector and of course here’s a must read from over one year ago …

Investing in Canadian energy stocks. And my update post on Canadian energy dividend stocks on Million Dollar Journey.

We are investing in iShares Energy Index ETF XEG and Eric Nuttall’s Ninepoint energy fund.

A look at more iShares offerings

And if we look at the iShares Quality Dividend Index ETF (XDIV) we see that the fund is also fighting back but not to the same degree as Vanguard’s VDY.

The High Dividend XEI is leading the charge. And it’s not surprising to see the torque in the Capped Financials – XFN and the equal-weight financial offering CEW.

You’ll find the XDIV index approach in the Tangerine Dividend Portfolio. In Canada, the U.S. and in International markets, that fund looks for the big dividend payers and also applies financial health screens.

I am still a big fan of the Tangerine Core Portfolios. They also recently launched the Tangerine Global ETF Portfolios.

I was an advisor with Tangerine for over 5 years, and I know first hand that the Tangerine portfolios beat the crap out of traditional high fee mutual funds.

Should you invest in dividend ETFs?

Of course that is a personal decision. And the Canadian home bias and preference for dividend investing is well known.

I find great use in the approach given my semi-retirement status. Generous income with market-matching or market-beating returns is superior for retirement funding. In fact, in the short history VDY is superior to XIC in a retiree’s portfolio (article to follow).

You might also check out (re our U.S. stocks) the Dividend Aristocrats for retirement.

If one is young and brave they might skip the dividends and go for greater growth. In the end it is about net worth, total returns and ‘how much money you got?’

And as always, greater diversification is paramount. Canadian stocks are just one weapon. Consider the new Balanced ETF Portfolio for ideas. You’ll also need a solid financial plan.

Thanks for reading ‘big Canadian dividends are having their way’.

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