5 new quality dividend ETFs for the core of a portfolio

Dividend-paying stocks can be an important source of income in the current market environment. Pat explains why and gives the low down on the iShares Core MSCI Quality Dividend Index ETFs.

There has always been a strong appetite for dividend-paying stocks, but their appeal has perhaps never been stronger than it is now. For many investors, dividend stocks have become fundamental building blocks at the core of their portfolios as the result of two important trends that have come to the fore over the past decade.

The first trend has to do with demographics – in particular, aging populations across the developed world. In Canada, for example, the number of seniors aged 65 and older more than doubled between 1982 and 2012 and projections show that seniors could account for more than one-quarter of the population by 2036, up from roughly 15% five years ago, according to Statistics Canada’s latest data. As such, more investors are moving into retirement than ever before, fueling a greater need for income-generating investments along the way.

This rising demand for investment income has been complicated by the persistence of historically low government bond yields since the financial crisis in 2008. This second trend borne from ultra-loose monetary policy has forced many investors to seek out higher-yielding alternatives including dividend stocks, which, on average, yield more than 10-year government bonds in most major developed markets, including Canada (see chart below).

iSH Blog Div idend vs. bond Jun17.2

These trends can be expected to continue for some time and dividend stocks, by turn, should remain in strong demand, not only for their relatively attractive yields, but also their potential to insulate investors as interest rates slowly begin to rise south of the border. This may be especially true of dividend growers which have proven resilient in rising rate environments in the past, according to BlackRock research.

With this in mind, not all dividend stocks are created equal and investors need to be knowledgeable about what they own. One option to consider is our new iShares Core MSCI Quality Dividend Index ETFs. The suite includes five funds in total:

  • iShares Core MSCI Canadian Quality Dividend Index ETF (XDIV)
  • iShares Core MSCI US Quality Dividend Index ETF (XDU)
  • iShares Core MSCI US Quality Dividend Index ETF (CAD-Hedged) (XDUH)
  • iShares Core MSCI Global Quality Dividend Index ETF (XDG)
  • iShares Core MSCI Global Quality Dividend Index ETF (CAD-Hedged) (XDGH)

Each of these funds is competitively priced with management fees ranging from as low as 10 basis points to 20 basis points. But what may distinguish them even further from other Canadian-listed dividend ETFs is the screening methodology of the underlying indices.

The first screen looks for companies with above-average dividend yields that have also maintained or increased their dividends over the past five years. Then, those companies are further screened based on measures of financial quality such as return-on-equity, earnings variability and debt-to-equity. This helps identify companies that have a greater potential to sustain dividend payments over time. Finally, to avoid value traps, the methodology screens out the worst performers by excluding the bottom 5% of securities with negative one-year price performance.

So what you’re getting is the opportunity to invest in strategies of high quality, high-yielding companies that have strong potential to provide attractive dividends in the future. Given the trends shaping markets today, our new suite of quality dividend ETFs could be a valuable addition to the core of a portfolio.

Pat Chiefalo is a managing director and head of iShares Canadian Product for BlackRock Canada. He is a regular contributor to The Blog in Canada.

iShares® Funds are managed by BlackRock Asset Management Canada Limited. Commissions, management fees and expenses all may be associated with investing in iShares Funds. Please read the relevant prospectus before investing. The funds are not guaranteed, their values change frequently and past performance may not be repeated. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional.

MSCI® and EAFE® are trademarks of MSCI, Inc. (“MSCI”). XDIV, XDU, XDUH, XDG and XDGH are permitted to use the MSCI mark and, as applicable, the EAFE mark pursuant to a license agreement between MSCI and BlackRock Institutional Trust Company, N.A., relating to, among other things, the license granted to BlackRock Institutional Trust Company, N.A. to use the indices. BlackRock Institutional Trust Company, N.A. has sublicensed the use of these trademarks to BlackRock Asset Management Canada Limited. XDIV, XDU, XDUH, XDG and XDGH are not sponsored, endorsed, sold or promoted by MSCI and MSCI makes no representation, condition or warranty regarding the advisability of investing in XDIV, XDU, XDUH, XDG and XDGH .

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