Spring is here and I’ve been swamped with family responsibilities, springtime jobs around the house and a surge in interest in one-on-one mentoring, which is great – no complaints here. Ideas for blog posts bloom like the dandelions on my lawn, but setting aside the time to write has proven difficult. Fortunately, David Stanley has come to the rescue – even though he’s equally busy preparing his gardens for the season. “The more grocery prices go up, the bigger the garden gets,” Dave tells me. As you will read, planting more tomatoes isn’t the only way to fight inflation – Beating the TSX can be a big help for the individual investor.
One of the many great things about my friendship with Dave is that he will frequently share good content that he discovers. Dave’s keen eye for what is interesting and relevant to DIY investors combined with his decades of experience with BTSX and a penchant for no-nonsense writing means that we can all benefit from his insights.
This time Dave shares his take on a recent Globe and Mail article by Rob Carrick about dividend ETFs. I’ve added my two cents at the end.
David Stanley on BTSX vs. Dividend ETFs
A few days ago, I read an article in the Globe & Mail by Rob Carrick entitled “Why dividend growth investors may want to pass on ETFs”. Of course, a title like that will grab my attention at any time, and I have in the past found Mr. Carrick a very strong advocate for the individual Canadian investor. The essence of Mr. Carrick’s opinion is as follows: Dividend growth is a profitable method to follow since it benefits not only from the dividend yield of the companies in which they invest but also from the usual yearly increases in those dividends.
However, he points out, dividend growth ETFs are composed of a portfolio of stocks based on certain rules and are rebalanced, usually on a yearly basis. For example, stocks may be dropped if they fail to increase their dividends for a specified period. Thus, stocks may be promoted or demoted and it would become extremely difficult for an investor to precisely calculate their expected income. This, of course, is in contrast with BTSX in which dividend income is easily estimated.
It would be unwise to disagree with this article as the conclusion is obvious, and I have no intention of doing so. However, it might be useful to see how Canadian dividend growth ETFs stack up against BTSX.
I will say in passing that some investors have questioned me about the absence of a factor to account for continuing rising dividends in our calculations. My reply is that since we are dealing with the bluest of blue-chip Canadian stocks one can be assured that dividend increases will occur in a timely fashion.
Looking at this year’s BTSX portfolio shows many companies that have excelled in growing their dividends.
According to Y Charts (ycharts.com), VDY, a Vanguard ETF (MER = 0.22%), XIU, a Blackrock ETF (MER = 0.18%), and CDZ, an iShares ETF (MER=0.66%) are the three best-performing dividend growth ETFs. As of the end of 2022, the 30-year average rate of return using the “Beating the TSX” method was 12.27%, compared to the benchmark index (XIU, which was launched in 1999, is now used as the benchmark), rate of return was 9.53% over the same time period.
Neither VDY or CDZ have been around as long as BTSX but this table shows comparable data:
Fig 1: BTSX vs. VDY & CDZ (AVG. ANNUAL RETURN)
BTSX vs. VDY (10 Yrs.)
BTSX vs. CDZ (5 Yrs.)
Beating the TSX surpassed both these ETFs and XIU handily. A lack of consistent income growth along with management fees cut significantly into ETF returns.
The conclusion of this work should be apparent. While ETFs purport to save the investor time and increase results by professionally selecting a group of dividend growth stocks, it is clear that the BTSX method of investing provides not only higher total returns but a much easier way to track your results.
There is a place for ETFs in the portfolios of individual investors but I lean towards simple, low MER index funds. I remain convinced that BTSX has been proven superior to any alternative when investing in Canadian dividend stocks.
Matt's thoughts on BTSX vs. Dividend ETFs
I love ETFs and I love blue-chip dividend-paying stocks, so you might think that an ETF of blue-chip dividend-paying stocks would be the holy grail for DIY investors. Unfortunately, as Carrick writes in his final paragraph, “. . . dividend growth investors may not find what they’re looking for in dividend ETFs.”
If you are a pre-retirement investor in your accumulation years, chances are you’re looking for growth. As David Stanley has pointed out, the total return of BTSX has outstripped all of the dividend ETFs mentioned. For a look at BTSX’s long-term performance, go HERE.
But for retirees, income is often priority #1. I have written about the research showing that retirees are generally reluctant to sell assets in order to generate income. This is why dividends are often so attractive. The ideal situation is to have a portfolio that generates a safe, steady and reliable stream of income that increases over time at or above the rate of inflation.
Unfortunately, big dividend ETFs like CDZ and VDY stumble when it comes to providing consistently growing income to investors. Over the last three years, CDZ’s monthly distributions have vacillated between $0.075 to $0.109. VDY is even more volatile with distributions anywhere from $0.089 in July 2021 to $0.207 in September 2022. Month to month they’re all over the place.
How does this compare with Beating the TSX? As we’ve seen this year with AQN and in 2020 with IPL, no dividend strategy is immune to dividend cuts but BTSX has provided remarkably consistent dividend income alongside its impressive total return numbers.
For the purpose of this post, I recalculated the dividend growth rate for BTSX. As of the end of 2022, the 5-year dividend growth rate for BTSX was 5.99% and the 10-year growth rate was even better at 6.07%. What about AQN’s dividend cut in early 2023? Accounting for this we still get a 5-year growth rate of 5.06% and a 10-year of 5.61% – well over double the likely long-term inflation rate.
Individual investors, and retirees in particular, need both capital appreciation so they don’t run out of money, and income so that they can pay for their living expenses. Dividend ETFs offer a simpler approach than buying individual stocks but, as Rob Carrick points out, “Unfortunately, dividend growth in the stocks held by a dividend ETF doesn’t always translate into dividend growth for investors holding the fund.” This makes cash flow planning in retirement very difficult.
I hope Carrick’s article and this post are helpful in understanding why dividend growth investors might want to pass on ETFs. The good news is that BTSX may provide a better alternative. For those investors who are willing to put in a little more time and effort, BTSX offers a simple, rules-based method that has provided superior total returns and relatively stable, growing income over the years.
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