TSE: XDV Review; a Closer Look at a Dividend ETF
- 12 Comment
On Monday, I posted the first article of a series about dividend investing for beginners. In this article, I have outlined the top 5 Canadian ETFs and the top 10 US ETFs tracking dividend stocks. As many of you expressed the desire to read about dividend stock analysis, I decided to start by reviewing the biggest (in market cap value) dividend ETFs in Canada: XDV, the iShares Dow Jones Canada Select Dividend Index ETF. While the Canadian market is very small compared to the US market, I think that looking into a country with strong banks (equals strong dividend payers) and a lot of natural resources (then again, strong dividend payers) could be interesting. I’ll review a few US Dividend ETFs in future articles.
XDV Overview
iShares is owned by BlackRock Canada, one of the biggest portfolio managers in the country. The XDV was created back in 2005 and has a yield of 3.65% since inception. The management fee is pretty low (0.50%) which provides a better chances of high yield. The current dividend yield is 3.80% and the income distribution is quarterly.
The index is built around the highest yielding stocks from the Dow Jones Canadian Index while taking into account dividend growth and payout ratio.
There are 30 holdings in this fund. Not a big surprise here while 7 out of the first 10 holdings are financial institutions in this ETF (CIBC, BMO, TD, National Bank, Scotia Bank, RBC and IGM (Investors Group)). Sometimes, I wonder what is the difference is between the iShares Dividend ETF and the iShares Financials index 
.
Overall, this ETF is heavily weighted in the Financials sector (almost 62%) followed by Telecommunications (12%) and Utilities (10%). Which represents the lack of choice or, if you prefer, the heavy concentration of the Canadian stock market in financials. Due to limited dividend paying companies, any Canadian portfolio will include a good part of financials or natural resources (if you consider income trusts).
A great feature of the XDV is that the income distribution can either be received in cash or reinvested in the iShares index. Therefore, you can avoid transaction fees when you stick with the same investing strategy.
Is it really worth it compared to dividend stock picking?
Since XDV is showing a high concentration in financials, I tried to compare it to 2 stocks (National Bank;NA and RBC; RY). For the past 5 years, taking those 2 companies would have generated a better return and probably a better dividend yield. The worst part is that they wouldn’t have been more volatile than the Dividend ETF since most of the holdings are financials anyway!
It shows a great example of what happens if you decide to sacrifice the diversification for the sake of a higher dividend yield. In the Canadian market, this means investing mostly in Financials! Overall, if you are a rational investor, you will keep your positions and make money. But in the meantime, having a huge concentration in one sector may be putting your dividend portfolio at risk. Especially if you plan on withdrawing a part of your capital.
Final thoughts on XDV
To be honest, I am a bit disappointed in this Dividend ETF as I was expecting a better diversification. The high yield dividend strategy leads to a high concentration in Canadian Banks. On the other hand, I can’t really say that investing in the world’s safest banks would be a bad move.
I would have appreciated a little bit more holdings in natural resources as those companies are not only paying dividends (through income trusts) but they are operating in a very promising sector for the upcoming years. Most countries are desperately looking for oil or gold and Canada has them both. So why not benefit from this potential in your dividend portfolio?
What are your thoughts about XDV?
You like it? You don’t? What is your take? Do you think that investing in Canadian Banks is enough to maintain a high quality dividend portfolio?
You are interested in dividend investing? Check out my Free Dividend Investing eBook and don't forget to sign-up to my RSS Feeds!
Similar posts:
12 Comments on this post
Trackbacks
-
Financial Cents said:
Good post. I must say though, holding XDV up against bank stocks alone is a little unfair, since they (bank stocks) tend to be the best dividend performers in Canada (since almost forever). XDV, while made up of ~60% financials, by construction will likely never achieve the same performance of banks; it will be “weighted-down” with other sectors.
All this said, for a 0.50% mgmt fee, you can hold a good set of 30 dividend-payers in your RRSP or TFSA and get those monthly (no longer quarterly) XDV distributions compounding for you. That ain’t bad
Cheers!August 4th, 2010 at 10:27 am -
Slacker said:
I think the resources stock pay distributions in ROC, interest, and only a small amount of eligible dividends. I’m currently looking for a income producing investment in my taxable account, and I’m narrowing down to XDV, or CPD. I have considered CDZ, but a lot of it is income trust, and produce taxable interests.
August 4th, 2010 at 1:33 pm -
Mike said:
@ Financial Cents,
You are right that Cnd banks are the best dividend payers around but the point was to know if you would not be better off with banks instead of the ETF… I’m still not convinced to take XDV for that reason.@ Slacker,
With the conversion of income trust, the distribution from the resources industry won’t be as interest as they previously were. XDV will generate more didvidend than CDZ but the latter is more diversified in a portfolio point of view. I’ll review more dividend ETF and dividend stocks in the upcoming weeks as the Canadian market is too small for a high paying dividend and diversified portfolio…August 4th, 2010 at 2:29 pm -
Canadian Dollars said:
I gotta agree. I purchased XDV about 5 years ago as a dividend play knowing full well that it would be filled with financials. It’s certainly been a bumpy ride but the decent dividend yield makes me want to hold this ‘forever’ with no real intention of selling.
August 4th, 2010 at 8:36 pm -
Michael said:
One thing to point out is iShares offers a Canadian Income Trust Index ETF (XTR). This fund is approximately 60% Oil/Energy, so it could compliment XDV. With the taxation on Income Trusts being different as Slacker mentioned, I appreciate being able to adjust my allocations between these two funds.
August 4th, 2010 at 9:31 pm -
Andrew said:
Great post and discussion, just what I was looking for in this blog.
August 5th, 2010 at 5:03 am -
Analyst Analyzer said:
I agree with Michael. iShares has the XTR to complement your dividend holdings. I reached a similar conclusion to you, I’d rather buy the banks individually than these large cap dividend paying ETFS/mutual funds.
Watch out for XTR and there are companies in there that will be converting to corporations.
August 6th, 2010 at 9:15 am -
Brad said:
The problem with an ETF is that it has bad companies as well as good. If an investor stays away from red flags (or whatever warning signs they trust in) then you should be able to avoid most of the downside that etfs have.
Now not all of it and an investor wont be right all the time. However if one can avoid the obvious bad companies then overall in the end they should be able to outperform an etf.August 8th, 2010 at 5:32 pm -
Think Dividends said:
I prefer Claymore’s Dividend ETF (CDZ) because it follows a dividend growth strategy versus XDV’s high yield strategy.
Here’s the comparison I did: http://www.thinkdividendsblog.com/2010/06/claymore-or-ishares.html
Cheers
August 9th, 2010 at 12:04 pm -
Slacker said:
I wonder what would happen to CDZ next year after the income trust conversions. Do they have to reset the 5 year clock for every company that has converted?
August 11th, 2010 at 11:40 pm -
ron said:
just reading this today, i have a bunch of XDV in my portfolio and for me, it works. Just a comment about ‘diversification’ as you (should) know, ETF’s are about indexes and market wieght so this security follows this concept IF other sectors or companies had the market wieght, they too would be included in the basket, this is not an actively managed ETF like some products, Claymore for example (by the way i think actively managed ETF is an oxymoron)
Regards
Happy InvestorDecember 12th, 2010 at 2:40 pm
[...] TSE: XDV Review; a Closer Look at a Dividend ETF (thedividendguyblog.com) [...]