August 8, 2022
Canadian investors tend to view dividend investing and dividend stocks favorably, and it's understandable why. The North American stock market is rife with blue-chip, large-cap, lower volatility equities with a long history of consecutively growing and stable dividend payments. Dividend income from Canadian equities is also taxed rather favourably, making them great options for retirees.
Dividends pay an important role when it comes to valuation and a stock's intrinsic value. When reinvested, they are critical in contributing to a stock's total return over time. A long-standing, stable dividend payout ratio can be indicative of a profitable, cashflow positive, and well-managed company. When companies cut dividends, it is often a warning sign of trouble ahead.
A common alternative to picking individual dividend stocks is via the use of dividend index exchange-traded funds (ETFs). These funds consist of a basket of Canadian, U.S., or international dividend stocks, but their composition depends on their underlying screening criteria, which typically comes in several forms:
Beyond these two criteria, the construction of a dividend index can also vary depending on its weighting methodology, which are the rules governing the overall allocation of its underlying stocks. Common methods include:
Dividend indexes constructed using variations of the above criteria and methodology can suffer from several deficiencies.
CI WisdomTree Quality Dividend Growth Index ETFs seeks to avoid the limitations of the above-noted approaches by incorporating a forward-looking screen for dividend growth. The underlying index screens for 3–5-year earnings growth estimate which allows the index to target and select companies that are currently growing their dividends and are assessed to have future dividend growth potential.
As a result, CI WisdomTree Quality Dividend Growth Index ETFs are able to capture the performance of younger dividend-paying sectors and companies such as Apple. This offers exposure to different sources of return, higher potential returns, and enhances diversification.
In addition, CI WisdomTree Quality Dividend Growth Index ETFs target dividend stocks with excess exposure to the "quality" factor, which is defined by low debt, stable earnings, consistent asset growth, and strong corporate governance. This involves screening potential holdings for sufficient return-on-equity (ROE) and return-on-assets (ROA) metrics.
Screening for quality helps exclude unprofitable, risky companies that may have high dividend yields or historical consecutive dividend growth, but poor fundamentals.
Finally, CI WisdomTree Quality Dividend Growth Index ETFs eschew market-capitalization or yield-based weighting in favour of a "dividend stream" weighting. Each stock is allocated a weight based on the dividends paid by the company over the previous 12 months (dividend per share x # shares outstanding). This strategy helps the index avoid over-weighting potentially overpriced stocks and the lack of diversification due to overconcentration.
For more information, check out our strategy guide, or view CI WisdomTree's full list of dividend ETFs.
Commissions, management fees and expenses all may be associated with an investment in exchange-traded funds (ETFs). You will usually pay brokerage fees to your dealer if you purchase or sell units of an ETF on recognized Canadian exchanges. If the units are purchased or sold on these Canadian exchanges, investors may pay more than the current net asset value when buying units of the ETF and may receive less than the current net asset value when selling them. Please read the prospectus before investing. Important information about an exchange-traded fund is contained in its prospectus. ETFs are not guaranteed; their values change frequently, and past performance may not be repeated.
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