Blue-chip dividend stocks have taken off lately, but there are still opportunities to grab yields in the 5-per-cent to 8-per-cent range.
With inflation at 2 per cent and interest rates falling, yields like this look great on the surface. But a high yield means a weak share price. When yields get to 6 per cent, 7 per cent or 8 per cent for a blue-chip company, it tells you investors have big concerns.
Exchange-traded funds holding dividend stocks offer a way to get a taste of high-yielding blue chips, with risk minimized through diversification. Consider the iShares S&P/TSX Composite High Dividend Index ETF (XEI-T) as an example.
BCE Inc. (BCE-T), with its 8.2 per cent dividend yield, is the fifth biggest holding in the fund at 4.8 per cent. Telus Corp. (T-T), with a dividend yield of 6.8 per cent, is the eighth biggest holding at 4.3 per cent. Enbridge Inc. (ENB-T), with a yield of 6.6 per cent, is the fourth-largest holding at 5.2 per cent.
Also in the XEI portfolio are shares of lower-yielding stocks such as Fortis Inc. (FTS-T), Royal Bank of Canada (RY-T) and National Bank of Canada (NA-T). But the overall portfolio trailing 12-month yield is a robust 5.1 per cent based on the most recent distribution.
Another example of an ETF holding high-yielding shares is the Fidelity Canadian High Dividend ETF (FCCD-T), which includes Sienna Senior Living Inc. (SIA-T), TC Energy Corp. (TRP-T) and Emera Inc. (EMA-T). All have yields of roughly 5.5 per cent and up, while FCCD as a whole has a trailing 12-month yield of 4.5 per cent.
Guaranteed investment certificates used to offer 5 per cent returns, but those days are done unless inflation comes back strong. Many investors are now using dividend stocks to generate yield, but with much greater risk than GICs. With a dividend ETF, you’re containing risk by limiting exposure to high-yielding stocks.
Dividend ETFs are a proven, popular way to hold a diversified portfolio of dividend-paying stocks, but there are some negatives. For one thing, fees can be higher than for traditional Canadian equity index ETFs. Also, you don’t receive pure dividend income, as you would if you owned shares directly. Dividend ETF monthly payouts typically include a small return of capital.
Another issue is that monthly distributions are not as predictable as dividends paid directly by a stock. Dividend ETF monthly payouts may creep up or down from month to month and year to year, according to the dividends paid by stocks in the portfolio. Don’t expect to see dividend hikes for individual stocks reflected immediately in the monthly payouts from a dividend ETF.
What dividend ETFs do offer is a way to scoop up some high-yielding dividend income without overexposure to any one stock. There’s value in that.