In Canada, it has been shown that over time, roughly 65% to 70% of the total return of equities comes from reinvested dividends. That makes for a very compelling case to have dividend stocks a key part of your portfolio. With that in mind, I reviewed a number high quality, dividend focused ETFs, and this is one that stood out as pretty attractive relative to its peers.
It invests in highly liquid Canadian stocks that have paid a stable or rising dividend over the past five years. It screens for dividends, and then holds the 45 largest stocks ranked by market capitalization. It is an adjusted market cap index, meaning it will make some adjustments to make sure one or two companies don’t dominate the portfolio. The index is reconstituted each year and rebalanced on a quarterly basis.
I like this over the iShares S&P/TSX Canadian Aristocrats Index ETF (TSX: CDZ) for a few reasons. PDC tends to focus more on larger names than CDZ, which is reflected by an average market cap that is nearly four times larger. The valuation and forward looking earnings numbers appear more favourable to PDC, giving it the edge over the long term growth potential. The dividend yield of PDC is also slightly higher, allowing investors to receive a higher income while they wait for stock price appreciation. Costs for PDC are also slightly less, with an MER that 12 basis points lower.
My big concern with PDC is its concentration in financials. At the end of April, it held more than 40% in financials and another 13% in REITs. The risk here is the potential impact to the banks if we see a meaningful slowdown in the Canadian housing market. More than 30% of the fund is directly invested in the banks, compared with a little more than 10% in CDZ.
Still, after my review, I see PDC as the most attractive option in the near to medium term.