In Canada, it has been shown that over time, roughly 65% to 70% of the
total return of equities comes from reinvested dividends. That makes for a
very compelling case to have dividend stocks a key part of your portfolio.
With that in mind, I reviewed a number high-quality, dividend-focused
exchange-traded funds (ETFs). The FundGrade A-Grade-rated
PowerShares Canadian Dividend ETF (TSX: PDC)
stood out as pretty attractive relative to its peers.
The ETF invests in highly liquid Canadian stocks that have paid a stable or
rising dividend over the past five years. It screens for dividends, and
then holds the 45 largest stocks ranked by market capitalization. The fund
NASDAQ Select Canadian Dividend Index, an adjusted market-cap index, which means it will make adjustments as
needed to make sure one or two companies don’t dominate the portfolio. The
index is reconstituted each year and rebalanced on a quarterly basis.
I prefer this PowerShares ETF over the competing
iShares S&P/TSX Canadian Aristocrats Index ETF (TSX: CDZ)
for a few reasons. PDC tends to focus more on larger names than CDZ, which
is reflected by an average market cap that is nearly four times larger. The
valuation and forward-looking earnings numbers also appear more favorable
for PDC, giving it the edge for long-term growth potential.
The 4.5% dividend yield of PDC is also slightly higher than the 3.8% for
CDZ, allowing investors to receive a higher income while they wait for
stock price appreciation. Costs for PDC are also slightly less, with an MER
of 0.55%, 12 basis points lower than the 0.67% MER posted for CDZ.
My big concern with PDC is its concentration in financials. As of March 3,
it held more than 43% in financials, including more than 8% weighting in
each of the top three holdings of
Royal Bank of Canada (TSX: RY),
Canadian Imperial Bank of Commerce (TSX: CM), and
Bank of Nova Scotia (TSX: BNS). Another 13% of the portfolio is weighted to real estate investment trusts
(REITs). The risk here is the potential impact to the banks if we see a
meaningful slowdown in the Canadian housing market. More than 30% of the
fund is directly invested in the banks, compared with a little more than
10% in CDZ.
Still, after my review, I see the PowerShares Canadian Dividend ETF as the
most attractive dividend option in the near to medium term.
PowerShares Canadian Dividend ETF
Canadian Dividend & Income Equity
FundGrade A+ Award:
Large Cap Value
PowerShares Management Team
Dave Paterson, CFA, is the Director of Research, Investment Funds for
D.A. Paterson & Associates Inc., a consulting firm specializing in providing research and due
diligence on a variety of investment products. He is also the publisher
Dave Paterson’s Top Funds Report,
offering regular commentary and in-depth analysis of Canada’s top
investment funds. He uses a unique analytical approach to identify
funds with strong, risk-adjusted returns, and regularly publishes his
insights and analyses in Fund Library.
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