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Research has long proven that dividends account for the lion’s share of long-term stock market returns, contributing nearly 70% of the total return for the S&P/TSX Composite Index over the past 10 years. That’s a very compelling reason to consider stocks, mutual funds, and ETFs that carry a high dividend yield. Here’s a mutual fund and its ETF counterpart to consider.
The Invesco Canadian Index Dividend ETF (TSX: PDC) and its mirror Invesco Canadian Dividend Index ETF Class mutual fund are among my favourites in the Canadian Dividend & Income Equity category, and I currently use it in my ETF portfolios. The mutual fund simply holds shares of the ETF. (Formerly these funds were branded under the PowerShares name, but Invesco last year phased out the PowerShares name and switched to the Invesco name for its funds.) In this article, I’ll refer to the ETF when detailing the fund’s holdings and performance.
The fund invests in highly liquid Canadian stocks that have paid a stable or rising dividend over the past five years. The managers screen for dividends and then hold the 45 largest stocks ranked by market capitalization.
The portfolio is in effect an adjusted market cap index that is reconstituted annually to counter the danger of excessive single-company weighting. And it is also rebalanced on a quarterly basis.
As of Dec. 31, 2018 fund was weighted 30% to the financial services sector, 21% to energy, and 17% to utilities. The fund has negligible exposure to materials, which makes sense, given its focus on yield. It is also underweight consumer names, healthcare, industrials, and technology.
Top holdings at the end of December included Enbridge Inc. (TSX: ENB), BCE Inc. (TSX: BCE), Bank of Nova Scotia (TSX: BNS), Canadian Imperial Bank of Commerce (TSX: CM), and TransCanada Corp. (TSX: TRP), expected to be renamed TC Energy in the second quarter of this year (the trading symbol will remain unchanged).
The underlying dividend yield is currently 5.25%. The portfolio is heavily weighted to large-cap stocks, with average market cap at about $19 billion. Longer-term performance has held up well, with 5-year average annual compounded rate of return posted at 4.1% as of Dec. 31, while 3-year return was 6.3%. As you’d expect, shorter-term performance lagged, along with the general market, with the fund posting a 1-year loss of 11.9%.
Still, the portfolio’s overall earnings outlook is also one of the most attractive of the dividend peer group, providing runway for share price growth in addition to attractive yield. A potential drawback is the concentration of the portfolio in energy stocks, with a 30% allocation to the sector, compared with about an 18% weighting in the S&P/TSX Composite Total Return Index.
Costs are reasonable, but not cheap, with an MER of 0.55% for the ETF. On balance, this fund remains a solid way to play the Canadian market, while offering an attractive yield.
Invesco Canadian Index Dividend Index ETF
Fund company: Invesco Canada
Fund type: Canadian Dividend & Income Equity
FundGrade Rating: B (December)
Style: Large Cap Value
Risk level: Medium
RRSP/RRIF Suitability: Excellent
Manager: Invesco Capital Management
MER: ETF 0.55%
Trading symbol: TSX: PDC
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 of 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.
Notes and Disclaimer
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Commissions, trailing commissions, management fees and expenses all may be associated with fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. This article is for information purposes only and is not intended as personalized investment advice.
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