Dividend balancing act

Dividend balancing act

Weighing two Vanguard ETFs for their payouts


These are difficult days for investors. Stocks are in  bear market territory. The bond market hasn’t seen losses of this magnitude in decades. And it doesn’t look like the turmoil will end soon.

The war in Ukraine grinds on, with Russian leaders recklessly hinting at the possible use of nuclear weapons. China’s economy, the economic leader in recent years, is bogged down. Covid is still a force, contributing to supply chain problems around the globe. Inflation rages while central banks raise interest rates en route to levels unseen since the run up to the financial crash of 2008.

Not surprisingly, I’m being bombarded with questions about where to hide from this storm. Here’s one from a reader who asked that her name be withheld.

“I am 61 years old and have invested in Vanguard Retirement Income ETF (TSX: VRIF). It has a 50/50 bond/stock portfolio. Is it wise to keep this ETF during this economic uncertainty? I like the dividends, which are almost 4%.

“Does VRIF pay dividends regardless or does it take from investors’ principal when its share price has decreased? Could I do better with another ETF? I need dividend/ETF income and the Conservative Vanguard ETF does not pay as high a dividend as this one.”

This lady is looking for low-risk cash flow, as are many of our readers. VRIF is theoretically designed to offer that. It purports to be a conservative ETF, suitable for someone like our reader.

The portfolio, which invests in seven other Vanguard funds, is equally divided between stocks and bonds. In normal times, this asset weighting should achieve the fund’s stated objective of providing “a combination of consistent income with the possibility of some capital appreciation.” But these times are anything but normal. Both bonds and stocks are in downtrends that probably won’t end soon.

As a result, this conservative fund is showing a total return loss of 13% year-to-date, as of the end of June. Investors may be wondering why they are paying an MER of 0.32% for this type of performance.

The fund makes monthly distributions, which are currently $0.09 per unit ($1.08 per year). That works out to a yield of 4.5% based on a recent price of $23.78. At first glance, that looks enticing, until you realize that the market price per unit is down $3.26 so far this year (to July 31). Distributions during that period have totalled $0.63. In other words, the yield is illusory – you’re losing much more of your capital than you are receiving in cash flow. You’d be better off putting your cash in a savings account and withdrawing whatever you need. Of course, this may change in the future, but that’s what you’re facing right now.

What are the alternatives? The bank account offers the least risk, but the return is negligible. A GIC ladder is equally safe (assuming it’s covered by deposit insurance) and will provide a better interest rate.

If our reader wants to stay with Vanguard and is prepared to live with more risk, she should consider the Vanguard FTSE High Dividend Yield Index ETF (TSX: VDY). It invests in a portfolio of large, dividend-paying Canadian companies, including the banks, Enbridge, Suncor, and Canadian Natural Resources. A word of caution, however. The portfolio is heavily overweighted to two segments: financials (54%) and energy (28%). That’s 82% of the assets, a huge bet on just two sectors.

So far, it’s been working. The fund posted a five-year average annual compound rate of return of 9.6% to the end of July and was down only 0.5% year-to-date at that point. Distributions vary from month to month, so there is no consistency of cash flow. The last payout was $0.126 per unit on July 29. The trailing 12-month total is $1.729, for a yield of 4.0% at the current price. At first glance, that seems less than the yield on VRIF, but as we’ve seen that’s not really the case.

The bottom line is there are no easy solutions in times like these. Investors must decide whether to take more risk in the hope of improved returns or hunker down in cash and/or GICs and wait it out.

Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.

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Notes and Disclaimer

Content © 2022 by Gordon Pape Enterprises. All rights reserved. Reprinted with permission. The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.