Traders work at the trading post that handles Citigroup stock on the floor of the New York Stock Exchange in this file photo.BRENDAN MCDERMID/Reuters
The defensive qualities of dividend stocks have been stress-tested in the stock market decline of early October and the results are so-so.
Let's consider eight Canadian dividend ETFs listed on the TSX. All were down for the month through Oct. 10, so any expectations of not losing money from a portfolio of dividend stocks seems unrealistic. The question then becomes, how much less than the index might you lose?
An exchange-traded fund tracking the S&P/TSX composite index was down 8.3 per cent for the past month. The eight dividend ETFs posted losses over the same period ranging from 4.9 per cent for the PowerShares Canadian Dividend Index ETF (PDC) to 7.9 per cent for the First Trust AlphaDex Canadian Dividend Plus ETF (FDY) and RBC Quant Canadian Dividend Leaders ETF (RCD). The others all lost between 6.4 and 7.4 per cent, which is to say they offered only a modest cushion against the losses of the broader market.
Of course, this is only a snapshot look at how dividend stocks perform under stress. But it does suggest that investors are being unrealistic if they expect to glide through a market correction because they own blue-chip dividend paying stocks. The point here isn't to undermine confidence in dividend stocks, but rather to help investors understand the benefits of holding them.
Really, it's about income. Globeinvestor.com shows the eight Canadian dividend ETFs have distribution yields (based on recent monthly dividend payouts) between 2.9 per cent for the Horizons Active Canadian Dividend ETF (HAL) and 4.4 per cent for the BMO Canadian Dividend ETF (XDV). The S&P/TSX composite dividend yield was about 2.5 per cent. So with dividend ETFs, you're getting more dividend income than you would from the broader market. Moreover, this is income that arrives no matter what the markets are doing. With the diversification of an ETF, the impact of a dividend cut or suspension from any one company is reduced to a very low level.
Dividend ETFs have outperformed the broader market during the rally of the past six years and have acquired an aura of near invincibility. Consider the past month a reality check. These stocks, and the ETFs that hold them, can decline almost as much as the broader market, even if they continue to pump out high levels of dividend income.
Rob Carrick