The TSX telecommunications sector, characterized by its oligopolistic nature, is dominated by a few key players who have carved out their territories. This reduced competition often translates to substantial pricing power and predictability of cash flows — two elements that can create a solid bedrock for investor dividends.
Recently, the landscape got even more heated thanks to Shaw Communication’s merger with Rogers Communications in early April. The resulting telecom titan now sits across from Telus, which is in the midst of a digital transformation and expansion into new lines of business.
Both players are popular among TSX investors for a combination of consistent dividend growth along with lower-than-average volatility, but, honestly, I wouldn’t buy either. As an exchange-traded fund, or ETF, investor, I prefer greater diversification. Betting on a single company isn’t my style.
Instead of picking between Shaw and Telus, allow me to pitch a relatively new but interesting ETF: Horizons Canadian Utility Services High Dividend Index ETF (TSX:UTIL). Let’s see what this ETF has to offer!
UTIL: Strategy and methodology
UTIL is a passively managed ETF. This means that the ETF manager, Horizons ETFs is not actively picking and choosing which stocks to hold. Rather, UTIL seeks to replicate the holdings of an external, rules-based index: Solactive Canadian Utility Services High Dividend Index.
Don’t let its name trick you; this index isn’t limited to pure-play utility companies. It actually holds a portfolio of 10 Canadian pipeline, telecom, and utility stocks, all of which pay dividend yields above 3%. These industries also offer a unique combination of inflation protection and historically lower volatility.
Compared to growth-oriented sectors like technology, Canadian utility, pipeline, and telecom stocks tend to invest less in research and development or marketing, electing to instead return earnings to investors in the form of dividends. If you’re seeking income, this ETF is the way to go.
UTIL: Notable features
What I like most about UTIL is its equally weighted nature. Most sector ETFs in Canada are market-cap weighted, where the largest companies receive the greatest exposure in the ETF’s portfolio. This can lead to concentration risk in a handful of large-cap stocks.
In contrast, all 10 stocks in UTIL receive an initial weight of 10% each and are re-balanced to this allocation periodically. This ensures that no single company can dominate the returns of the ETF, which can potentially reduce risk and volatility. Right now, Telus is around 8%, while Rogers (AKA Shaw) is around 9%.
Remember, this is a yield-focused ETF. Over the last 12 months, UTIL has paid a trailing yield of 3.04%, with Horizons projecting an estimated annualized yield of 3.83%. In exchange, investors in UTIL must pay an annual management expense ratio of 0.62% for the ETF’s fees and costs.
