There are many great dividend stocks in Canada. I personally have about 30 that I’m watching for when I begin my Smith Manoeuvre. However, if you’re looking to mutual funds to fill the Canadian dividend portion of your portfolio, you may not be getting what you pay for.
First off, since these funds have Management Expense Ratios (MERs) in the 1.6-1.7% range, this creates quite a drag on the dividend income you can expect from this type of fund. To compensate for this, fund managers have to look elsewhere to bring the payout back up.
Four of the five major Canadian Banks have Canadian Dividend funds that are made up of only about 85% Canadian equities. TD bank was the only exception, being in the 95% range. The rest of these funds include T-bills, as well as US and international equities. Even within the Canadian equities portion, not all stocks are dividend paying equities and other stocks have low or unstable dividend payments.
This creates a few issues. You are not getting only the dividend paying equities that you were looking to add to your portfolio, you are likely just adding another high-MER equity fund with a different name. This fund will also not provide the tax efficiency of a true dividend only fund, since the payouts include capital gains and return of capital (ROC).
So what are your options for adding dividend paying companies to your portfolio? With mutual funds, not much, though the TD Dividend Growth funds may be closer to the real thing. Your best option might be Exchange Traded Funds (ETFs). Two great choices are the iShares CDN Dividend Index Fund (XDV) or the Claymore S&P/TSX Canadian Dividend ETF (CDZ). While you would have to pay commissions to buy these ETFs, the 0.5-0.6% MER and the fact that you get the dividend paying stocks that you’re looking for will make it worthwhile.
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Tom Drake is the owner and head writer of Canadian Finance Blog.
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I totally hear you with the MER
I had the Scotiabank Dividend Growth fund, and it had a 1.6% MER. My annual dividend was effectively less than what was taken from the MER.
USELESS!
Rick, if you’re just starting out and you want a balanced RRSP portfolio, look at the TD eSeries funds. You could transfer your RBC mutual fund to there through the application form.
TD e-Series Funds
How To Setup and Rebalance TD e-Series Funds
While the dividend ETFs could replace the RBC dividend fund just fine, I wouldn’t recommend only that in your RRSP.
I am just starting to save money through an RRSP at Royal Bank. I dont have much saved yet, but I’m thinking of transfering it to one of the Dividend ETFs you mentioned. Would it be stupid to put all of my RRSP amount into one ETF? If so, how much of your portfolio should you put towards dividends?
I own TD Dividend Growth funds that I contribute to on a monthly basis. I don’t have enough money in it (under $3k) to switch to an ETF, but the TD Canadian Index e-Series has a very attractive MER of .31% (vs 1.92% for Dividend Growth). My plan is to accumulate mutual funds first then switch to ETFs eventually.
Given my position am I better off switching to TD Canadian Index e-Series? I’m only in my 2nd year of investing.
VP, I’d have to suggest the e-Series funds again. In this article I looked at the dividend ETFs to be a closer comparison to the dividend mutual funds, but ultimately these “dividend” funds are just another equity fund.
But when is comes to what you might want when starting out with investing. The four e-Series funds I mentioned in the links above are hard to beat. I was in the exact same situation starting out as you and Rick, I switched to the e-Series funds in my second year and haven’t looked back!
You have the right idea that making the switch would instantly improve your chance of good results by 1.61%… but equally important is that the Canadian Index e-Series covers the entire TSX and gives you better diversification than what you currently have.
Thanks for the advice. I too have less than 3k, so I guess it was a bit premature for me to be looking at ETFs. I’ll definitely look into the e-Series funds.
Fantastic blog, by the way!
[...] A Canadian Royalty Trust, also known as a CanRoy, is a corporate trust that is set up to legally bypass high corporate taxes in order to funnel profits back to trust holders in the form of distribution payments. A CanRoy usually controls an operating company that uses the money invested in the trust to buy oil and gas producing properties. While approximately 40% of CanRoys invest in energy-related businesses, the remainder back other types of organizations. In this structure, money also flows the opposite way as the royalties and interest payments from the properties flow back through the operating company and into the trust. Eventually, these funds are paid out to investors in the form of distribution or dividend payments. [...]
When an equity fund reinvests the dividend back into the fund, should the fund investor see his number of units grow or does the number of units in the portfolio remain unchanged?