Summer brings to mind lush gardens and the joy of harvesting one's own produce. As we savor our first yellow beans, it's an apt time to delve into a different kind of growth - that of Canadian dividend stocks.
The S&P/TSX Canadian Dividend Aristocrats Index, or simply the 'aristocrats index', has been a beacon for investors seeking dividend growth. Over 14½ years, it delivered a compound annual growth rate of 10.3%. However, an interesting twist lies in its weighting mechanism - based on dividend yield rather than market capitalization. This unique approach sets it apart from traditional indices.
Weighing the Options
The aristocrats index's weighting strategy, while intriguing, may not be the optimal approach. A size-weighted portfolio of its stocks achieved an impressive 11.8% annual growth, while an equally-weighted portfolio gained 11.4% annually. This suggests that the index's yield-based weighting might not be the most efficient method for maximizing returns.
High-Yield Focus
A focused portfolio, selecting the top 10% of stocks with the highest dividend yields from the aristocrats index, performed well with an average annual gain of 9.0% over the same period. However, it lagged behind both the aristocrats index and the broader Canadian market index, highlighting the potential risks associated with high-yield strategies.
ETF Convenience
For those seeking convenience, the iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (CDZ) offers a simple solution with an annual fee of 0.66%. Over 10 years, it delivered an average annual return of 10.7%. However, a more diversified option, the iShares Core S&P/TSX Capped Composite Index ETF (XIC), with a lower fee of 0.06%, outperformed it with average annual returns of 12.8% over the same period.
Building Your Own Portfolio
Many Canadian dividend investors prefer to craft their own portfolios. The aristocrats index can serve as a valuable starting point. For instance, a portfolio comprising the 20 largest stocks in the index, including the big Canadian banks and energy companies, offers a solid foundation. Alternatively, investors seeking low-volatility stocks might opt for the 20 stocks with the lowest volatilities over the prior 260 days, a strategy that delivered an average annual return of 12.5% over 14½ years.
Momentum Twist
Active investors might consider a momentum-based approach, selecting the 10 stocks with the highest returns over the prior year. This strategy yielded average annual gains of 13.5% over the same period. However, the frequent updates required for momentum-oriented portfolios may be at odds with the long-term, low-cost approach preferred by many dividend investors.
Personal Perspective
As a dividend enthusiast, I've invested in many of the companies mentioned. While I'm optimistic about the long-term prospects of these dividend portfolios, it's important to remember that market performance is never guaranteed. Diversification beyond dividend growth stocks is crucial for a well-rounded investment strategy. For a broader selection of dividend and value stocks, I recommend exploring the resources available at The Globe and Mail's Inside the Market section.
Final Thoughts
The aristocrats index and its various strategies offer intriguing options for Canadian dividend investors. However, it's essential to consider the broader market context and potential risks associated with high-yield or momentum-based approaches. Building a diversified portfolio, combining dividend growth stocks with other investment strategies, is key to long-term success.
Further Reading
For those interested in exploring more dividend and value stock options, I invite you to visit the link provided for a comprehensive guide to portfolios tailored for value and dividend investors.
