This August, I’m seriously considering making some changes to my portfolio.
With all the gains that the broader markets have been making over the last few years, driven primarily by big tech stocks, I’ve been considering allocating some of my money to less richly valued sectors. While almost nothing in the Canadian market is truly “cheap” right now, some things are less richly valued than others.
The “less richly valued” category, as it turns out, includes many classic dividend-paying sectors, such as banks, utilities and energy companies. While all three categories made considerable gains in the last year, they remain cheaper than the North American market averages. More importantly, they all pay above-average dividends! In this article, I will share one Canadian ETF built on the types of stocks just mentioned, which I’m considering adding to my portfolio this year.
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Vanguard Canadian High Yield Dividend ETF
The Vanguard FTSE Canadian High Yield Dividend Index ETF (TSX: VDY) is an index fund built on the FTSE Canadian High Yield Index. The index is overwhelmingly dominated by banks and energy companies, as well as utilities to a lesser extent. The fund has 60 constituent stocks, making it fairly diversified, although there is some concentration risk stemming from the fact that 77% of the fund’s weighting is in banks and energy. With that said, there is plenty of diversification within the banking and energy sectors; for example, energy breaks down into extraction and production, midstream, refining, and integrated energy. So, the concentration risk present here is not thesis-breaking.
Fund holdings
The main thing that VDY has going for it is its quality holdings. The fund holds 60 stocks, which is a decent amount of diversification. It has considerable exposure to Canadian banks, energy companies, and utilities. Finally, the fund’s index screens for dividends, which in turn screen for profit. So, VDY’s underlying portfolio has a lot to recommend it.
Dividend potential
Next, we can look at VDY in terms of its potential dividend income.
VDY is a monthly paying dividend fund that pays about $0.18 per month in dividends on average. $0.18 per month works out to $2.16 per year. At today’s price of $77.07, those dividends combined with the ETF price give us a 2.8% dividend yield. So, if you invest $100,000 into VDY, you should get back at least $2,800 per year (assuming no dividend cuts).
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| VDY ETF | $77.07 | 1,298 | $0.18 per month ($2.16 per year) | $233.65 per month ($2,803 per year) | Monthly |
Fees, expenses, and other basic fund facts
Last but not least, we should look at VDY’s basic technical characteristics like fees and spreads. These have some bearing on the return you actually take home (fees eat away at returns).
VDY has a 0.22% management expense ratio (MER), which comprises management fees and execution-related fees. This is not that high by the standard of all ETFs, but is a little on the high end for an index-tracking ETF. I wouldn’t let it deter me from investing in VDY.
Next up, the bid-ask spread. Sources online report that VDY usually has a bid ask spread in the one to three cent range. This is about 0.01% to 0.04% the market price. So, when you trade VDY, you do not pay out an overly high percentage to market makers. This is yet another hallmark of a quality fund.
Foolish takeaway
All in all, VDY has the characteristics you’d want in a thematic ETF. The diversification is moderate, the fees are reasonable, and the spread is not too wide. Overall, it’s a strong contender for inclusion in my portfolio someday.
