Skip to main content

May 15, 2024

Investing in Canadian Dividend Index ETFs: A Forward Growth Approach

Dividend Growth ETFs

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.

The rundown on dividend indexes

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:

  1. Many dividend indexes screen for high yields by filtering for dividend stocks that currently have a large payout
  2. Other dividend indexes use a backwards-looking screen to select companies with a historical pattern of increasing dividends for a certain consecutive number of years     

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:

  • Weighting by dividend yield: Higher yielding dividend stocks are assigned a proportionately larger weight compared to lower yielding ones.
  • Weighting by market capitalization: Large-cap stocks are assigned a proportionately larger weight compared to mid or small-cap stocks.

Not all dividend indexes are created equal

Dividend indexes constructed using variations of the above criteria and methodology can suffer from several deficiencies.

  • Selecting and weighing stocks for high dividend payouts can lead to a "yield trap" situation, where the dividend yield is higher as a result of falling share prices or an unsustainable payout ratio. Energy and utilities stocks are common examples of this.
  • Selecting and weighing stocks by historical dividend growth limits the ability of the index to capitalize on up-and-coming growth sectors, like technology, or younger dividend paying companies. A notable example of this is Apple, which is not eligible for inclusion in a variety of dividend indexes despite being one of the largest dividend-paying stocks (in terms of total dividend dollars) in the U.S. market.
  • Selecting and weighing stocks by market capitalization also leads to a top-heavy index overly concentrated in certain sectors, such as energy and financials.

A better approach to dividends: future growth

CI 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 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 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 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's full list of dividend ETFs.

About the Author

Jaron Liu


Jaron Liu

Director, ETF Strategy
CI Global Asset Management

Jaron Liu is a Director of ETF Strategy at CI GAM and is responsible for growing the ETF business by setting and executing the ETF sales strategy as well as supporting the ETF sales team. Prior to joining CI GAM, Jaron worked as an analyst within product management for one of the largest global asset managers where he focused on ETFs. Jaron graduated from the University of Waterloo with a degree in Honours Economics and is a CFA charter holder.

IMPORTANT DISCLAIMERS

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.

“WisdomTree®” and “Variably Hedged®” are registered trademarks of WisdomTree Investments, Inc. and WisdomTree Investments, Inc. has patent applications pending on the methodology and operation of its indexes. The ETFs referring to such indexes (the “WT Licensee Products”) are not sponsored, endorsed, sold, or promoted by WisdomTree Investments, Inc., or its affiliates ("WisdomTree"). WisdomTree makes no representation or warranty, express or implied, and shall have no liability regarding the advisability, legality (including the accuracy or adequacy of descriptions and disclosures relating to the WT Licensee Products) or suitability of investing in or purchasing securities or other financial instruments or products generally, or of the WT Licensee Products in particular (including, without limitation, the failure of the WT Licensee Products to achieve their investment objectives) or regarding use of such indexes or any data included therein.

This document is provided as a general source of information and should not be considered personal, legal, accounting, tax or investment advice, or construed as an endorsement or recommendation of any entity or security discussed. Every effort has been made to ensure that the material contained in this document is accurate at the time of publication.  Market conditions may change which may impact the information contained in this document. All charts and illustrations in this document are for illustrative purposes only. They are not intended to predict or project investment results. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment. Investors should consult their professional advisors prior to implementing any changes to their investment strategies.

Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend upon or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “intend,” “plan,” “believe,” or “estimate,” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained herein are based upon what CI Global Asset Management and the portfolio manager believe to be reasonable assumptions, neither CI Global Asset Management nor the portfolio manager can assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.