Instead of looking at dividends purely as an income play, I like using them as a potential quality and valuation screen.
For example, a stock with an unusually high dividend yield is not always a good thing. Remember that yield is calculated by dividing the dividend by the share price. Sometimes a yield looks attractive simply because the share price, the denominator, has fallen substantially.
If the payout ratio appears sustainable and management has not cut the dividend, that could be a signal to dig deeper into the fundamentals and determine whether the stock represents a genuine value opportunity.
Dividend growth can tell us something different. Companies that consistently increase their dividends year after year often share several attractive characteristics.
Management tends to be disciplined with capital allocation. Balance sheets are usually stronger. Cash flows are often more predictable. Most importantly, there needs to be enough underlying profitability to support those growing payouts.
That combination can make dividend growers attractive long-term buy-and-hold investments. Fortunately, investors do not need to screen individual stocks themselves.
Several exchange-traded funds (ETFs) use rules-based indexes that specifically target companies with long track records of increasing dividends. Here are two options available to Canadian investors.
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The iShares option
iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (TSX: CDZ) is the older and more established option. The ETF debuted in September 2006 and has since grown to more than $1.2 billion in assets under management.
CDZ tracks an index that screens for Canadian companies that have increased their dividends for at least five consecutive years. The result is a portfolio currently consisting of 96 holdings.
Sector exposure is concentrated primarily in energy, financials, industrials, and utilities, which is not surprising given where many of Canada’s established dividend growers reside. Investors currently receive a trailing 12-month yield of approximately 3.07%, paid monthly.
The main drawback, in my view, is cost. CDZ carries a 0.60% management fee, which is relatively expensive for a passive ETF. Over long periods, that fee creates additional drag on both yield and total returns.
The Hamilton option
Investors looking for a lower-cost alternative may want to consider Hamilton CHAMPIONS Canadian Dividend Index ETF (TSX: CMVP). At first glance, the yield appears lower at 2.83%, but that does not tell the whole story.
CMVP is significantly cheaper than CDZ with a 0.19% management fee. The ETF tracks the Solactive Canada Dividend Elite Champions Index, which requires companies to have increased dividends for at least six consecutive years without any reductions.
Hamilton notes that the portfolio’s constituents have delivered an average annual dividend-growth rate of approximately 10%, while the average market capitalization sits around $100 billion. That firmly places the portfolio in blue-chip territory.
Sector composition differs somewhat from CDZ as well. Financials play a much larger role within CMVP, while industrials and materials represent the second- and third-largest sectors.
For investors focused on dividend growth rather than simply maximizing current yield, CMVP’s combination of lower fees and stricter dividend-growth requirements makes it an interesting alternative.
