Tag Archives: ETFs

Dividend ETFs: Finding Stability and Growth in Income Investments

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Discover the Keys to Identifying Dividend ETFs that offer Consistency, Quality, and Long-Term Growth

Image from Pexels/Anna Nekrashevich

Higher interest rates mean dividend-paying stocks must increasingly compete with fixed-income investments for investor interest. However, sustainable dividends still offer an
attractive and growing income stream for investors.

Companies that pay regular and growing dividends have performed very well over the long run when compared to the broad market indices. For example, a simple strategy such as selecting stocks with an extended history of uninterrupted dividend growth, such as represented by the S&P 500 Dividend Aristocrats, has added 11.5% per year over the past 30 years. This compares to the 10.0% annual gain for the S&P 500 Index. And not only did the dividend payers beat the overall market, but they were also less volatile.

The superior long-term performance of the dividend growth companies can be attributed to a combination of several factors: Companies with long histories of regular and growing dividend payments generally have sound competitive business models and growing profits; these are also companies with experienced managements that make disciplined capital allocation decisions, strive for lower debt levels, and operate firms more profitable than their peers.

Notably, though, the Dividend Aristocrats’ performance lagged over the past 5 years against the S&P 500 index.

Most of this underperformance came over the last year and a half, as higher interest rates made fixed-income investments, such as GICs, more attractive for income-seeking investors when compared to dividend-paying equities.

The dividend sweet spot

Income-seeking investors who decide to take on the risk of the stock markets are faced with a wide range of options including “yield enhanced” dividend-paying ETFs, moderate-yielding companies with average growth rates, and low-yielding but fast-growing companies. Then there is also the group of companies that have very high dividend yields and may seem attractive but, unfortunately, come with elevated risk.

In many cases, a high yield may be a warning sign that all is not well with a company and that future dividend payments are at risk of being cut.

As well, a dividend cut, or even an outright dividend suspension, is often accompanied by a steep decline in the share price, as income investors dump their former dividend favourites.

A 2016 study by a group of U.S.-based academics provides some statistical guidelines for sensible dividend-based investing.

In reviewing the performance of almost 4,000 U.S. companies over 50 years, they found that dividend-paying stocks beat non-dividend payers.

In particular, the middle group of dividend yielders (i.e., those with an average yield of 4.3%) surpassed both the low yielders and the high yielders in terms of total return. Equally important, this superior performance was achieved with lower risk, as measured by the standard deviation of returns.

Based on this long-term study, it makes sense to avoid the highest-yielding stocks and rather look for companies with moderate yields and sound growth prospects. This safety-first approach will result in a lower yield but likely provide a better total return (dividends plus capital) at lower risk.

How to spot dividend ETFs worth investing in

When investing in dividend-paying companies through an ETF, here are key factors to consider: Continue Reading…

Vanguard S&P 500 is a third of my portfolio

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Vanguard S&P 500

 

By Alain Guillot

Special to Financial Independence Hub

My investment strategy is to buy more every time I have more money. I don’t time the market. I know that investments (on the long run) will eventually go up.

No one knows when the market will tank or when it will rally. So why waste my brain energy trying to stay informed and anticipate, or react to the market? I just buy and buy some more.

When will I sell? Hopefully never, but the second best answer is: When I retire, when I need the money for personal living expenses. In that case, I will just take the money out when I need it, not when the market conditions are right (we never know when the market conditions are right).

Generally I divide my investment in three parts: 1/3 Canadian stocks, 1/3 U.S. stocks, and 1/3 international stocks.

I don’t know how much money I have made since I don’t know how to account for all the dividend payments I have been getting. But it’s a lot.

Investing in the stock market is safest way to invest your money. Yes, there is day to day volatility. If you learn how to ignore the new, the latest development, the latest emergency crisis, the latest election, you will be OK.

Of course, it’s not easy to avoid all the noise. Media companies spend billions of dollars every year finding new ways to capture your attention. The worst part is that “bad news” is a very potent attention-grabbing tool and many people fall victims of it. I have friends who have their money in cash, gold, or silver because the next financial catastrophe is coming. If they only knew how to calculate all the money they have left on the table, it’s worse than any catastrophe they have envisioned.

The bedrock of my U.S. investment is the Canadian dollar Vanguard S&P 500 Index; here is the symbol, VFV. It trades in the Toronto Stock Exchange. My strategy is to buy some more every December.

The Vanguard S&P is a fund that invests in the stocks of some of the largest companies in the United States.

This is a great investment because it’s well diversified and is made up of the stocks of the largest U.S. corporations. These large corporations tend to be stable with a solid record of profitability.

How much money can you earn?

We are not in the business of predicting the future, but here are some of the past results:

Rate of return investing on the S&P 500

As you can see the rate of return for 3 years is 42%, for 5 years is 66%, and for 10 is 304%. This is the best return you can get for your money. This is a great investment opportunity if you have the patience to wait for it.

How to invest in the Vanguard S&P 500

You can buy shared of the S&P 500 as you buy shares of any stock. Continue Reading…

The Power of Low-Fee Core Bond ETFs in your Investment Portfolio

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By Alizay Fatema, Associate Portfolio Manager, BMO ETFs

(Sponsor Blog)

The latest economic data unveils a captivating narrative of a strong and resilient economy in both Canada and the U.S. The current inflation stickiness and robust job market numbers make a solid case for the central banks in both countries to keep interest rates higher for longer.

Towards the end of September 2023, markets basked in record-high yields. However, earlier this month, based on the current situation in the Middle East, bond yields fell owing to an increase in demand for safer assets and caused longer-term bond prices to surge.  U.S. consumer prices remained elevated for the month of September and a pullback in demand for a treasury auction pushed longer-term yields higher again, resulting in 10-yr U.S Treasury yields touching their highest point since 2007. On the contrary, the recent CPI printed lower than expectations in Canada, yet the yields remain high as hot economic data continues to build pressure south of the border.

Source: Bloomberg

Given the current two-decade-high interest rates, yields on Aggregate Bond ETFs have surpassed 5%, making them an interesting avenue for fixed-income investors. Before we dive in further, let’s discuss some aggregate bond ETFs in detail along with their benefits.

Aggregate Bond ETFs as the Core of your Investment Strategy

Aggregate bond ETFs are exchange traded funds that aim to track performance of a diversified portfolio of bonds. These ETFs are referred to as core because it reflects their status as a foundational building block of a well-rounded investment portfolio. These ETFs can help investors achieve diversification, steady income & stability within their investment portfolios. BMO currently offers two Aggregate Bond ETFs:

  • BMO Aggregate Bond Index ETF (ZAG) aims to replicate the performance of the FTSE Canada Universe Bond Index. This ETF primarily invests in a Canadian investment-grade fixed income securities consisting of Federal, Provincial and Corporate bonds, with a term to maturity greater than one year.
  • BMO US Aggregate Bond Index ETF (ZUAG) tracks the performance of the Bloomberg US Aggregate Bond Index. It invests in U.S. investment-grade bonds such as U.S. treasury bonds, government-related bonds, corporate bonds, mortgage-backed pass-through securities, and asset backed securities with a term to maturity greater than one year. ZUAG is also offered as hedged to CAD (ZUAG.F) and in USD (ZUAG.U).

Source: BMO Asset Management.

These aggregate bond ETFs have proven to be an extremely viable investment solution owing to their key features:

  • The Symphony of Diversification: Aggregate Bond ETFs provide exposure to a broad spectrum of bond market offering diversification across the curve, various sectors and segments, maturities, issuers, and credit qualities; making them resilient for any market environment.

For example, in the current high-interest rate environment, exposure to short duration bonds might provide some down-side protection. On the other hand, if central banks start cutting rates, then longer duration can provide some upside potential.

Aggregate Bond ETFs can also be considered an equity market hedge. Given the inverse correlation between equities and bonds, they can provide a cushion against market turbulence and can potentially outperform stocks during selloffs.

  • Harnessing Cost Efficiency through Lower Fees: These ETFs are passively managed with the aim to track performance of the aforesaid indices. Their expense ratios are lower as compared to some actively managed funds, thereby reducing overall investment costs and improving net returns for investors. BMO is currently charging a Management Expense Ratio of 0.09% for both ZAG & ZUAG.  
  • Liquidity & Ease of Trading: Like all other ETFs, ZAG & ZUAG are traded on stock exchanges, enabling investors to easily buy and sell shares throughout the trading day, allowing them to see real-time prices. The bid-ask spreads on these products are lower in contrast with the underlying bonds which enhances their liquidity compared to traditional bonds, making them a cost-effective way to attain the exposure to the aggregate bond market.
  • Navigating Risk Management through High Credit Quality: Aggregate Bond ETFs are perceived as a stable and safer investment option as they provide exposure to investment-grade bonds, which are considered to have lower risk as opposed to high-yield or junk bonds. In the current rising interest rate environment, the credit quality & relative stability of the investment grade bonds make them an appealing choice for investors seeking to minimize risk & preserve capital.

Combined with the key features mentioned above, these Aggregate Bond ETFs provide investors with a low-cost core in any investment portfolio. They distribute monthly interest payments, providing a steady stream of income. These ETFs emphasize on preservation of capital and provide transparency and visibility into the funds’ composition and their underlying assets. Continue Reading…

Interview with Harvest ETFs CEO Michael Kovacs on how Retirees can generate income in volatile markets

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The following is an edited transcript of an interview with Michael Kovacs, CEO of Harvest ETFs, conducted by Financial Independence Hub CFO Jonathan Chevreau.

Jon Chevreau (JC)

Thanks for taking the time today, Michael. We all know that 2022 was a pretty bad year as markets were impacted by higher interest rates. That turbulence bled into much of 2023, although the last few weeks have seemed much rosier.

How do you respond to unitholders of funds who are currently down year over year? Does your covered call writing protect retirees?

Michael Kovacs

Michael Kovacs (MK)

Thanks for having me, Jon. It is important to remember that we offer equity income funds. That means that you have to look at the total return of the product, which includes the price of the ETF and its accumulating distributions.

Yes, there has been turbulence in 2022 and through much of 2023. However, over that period, products like the Harvest Healthcare Leaders Income Fund (HHL) have paid consistent distributions.

Let’s look at the Harvest Diversified Monthly Income ETF (HDIF). In terms of actual returns, this ETF is down nearly double-digit percentage-wise in the year-over-year period (as of early November). But, when you look at the distributions paid over that same period, HDIF has delivered positive cashflow for its unitholders, which reduces the decline by more than half.

JC

Are you saying that between the covered calls, the distribution and the leverage plus the underlying equity income, that a retiree could expect annual yields as high as 10% or 12% or higher?

MK

Yes. Yields are anywhere from 1.5% to 3%, depending on the equity category. Then you have option writing. We can go right up to 33% on any of those portfolios, which generates additional yield. So, to be able to generate 9-10% is very achievable. And we’ve been able to do that consistently for a quite a few years now.

Jon Chevreau

JC

What is your view on the current interest rate climate? Have we reached a top? If so, when will they start to come down?

MK

Many of us remember the high interest rates of the 1980s, especially some of your readers who were trying to obtain their first mortgages. We have experienced a big jump in interest rates over the past two years. However, we believe that we have probably seen the top for rates for now. Or, if we haven’t, we are very close to the top. That means there are going to be some great opportunities in fixed-income markets. The next move for interest rates may be down by mid-to-late 2024.

That said, there are still great opportunities that will benefit equities and bonds in the current climate. Our first launch in the Bond area is the Harvest Premium Yield Treasury ETF (HPYT). We’ve launched with a high current yield. We are targeting long treasury bonds in this fund. This is about generating a high level of income while owning a very good credit-worthy security like a U.S. Treasury. So, if rates start declining next year, it is a great time to be holding fixed income.

JC

Findependence Hub readers tend to be retirees who want steady cash flow. What is Harvest’s view of cash flow for retirees?

MK

I think cash flow for retirees is essential. Once your employment income has gone, you must depend on your investments, your pensions, your CPP, and so on. The recent increases in interest rates have been good for retirees in the short term. Higher rates allow retirees to keep shorter-term cash and generate a safe yield of 5% or more.

Our longer-term equity products aim to have that heavy bias toward equities. For example, the Harvest Healthcare Leaders Income ETF (HHL) is typically written at about 25-28% average, with the other 70% or so fully exposed to health care stocks. The covered call option writing strategy allows us to generate a high level of income.

Cash flow is the basis behind our name: Harvest. People have spent decades building up capital, sowing the seeds. Our products allow them to harvest the fruits of their life-long labour.

We believe our equity-income and fixed-income products are a fantastic way to do that. If we can help you preserve capital and generate consistent income, we are doing our job.

JC

There is also interest among investors in asset allocation ETFs. Is HDIF essentially your answer to that demand?

MK

You’re correct. Some people prefer to allocate to specific funds, but the idea behind HDIF is to allocate to the best of Harvest’s top products that generate cash flow. In the case of HDIF, you do have a leverage component. You are increasing the yield but at the same time, you do increase your risk as well. Continue Reading…

These three ETFs are responsible for most of my wealth

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AlainGuillot.com

By Alain Guillot

Special to Financial Independence Hub

I was a day trader for almost 10 years.

Oh, I was so smart. I was smarter than the market and all its participants. But I was not, I was delusional. I wasted my time trying to guest the direction of the markets. I had good months in which I felt I was going to be a millionaire, and then in one bad trade I would lose most of my gains.

The one lesson I discovered, and maybe was worth the price of all my losses was that passive investment works.

The strategy create by John Bogle many decades ago is till paying huge dividends. Mr. Bogle was the founder of Vanguard Funds, the inventor of Passive Investing, a strategy created for the masses. Ever since I started passive investing my portfolio has been going up at a staggering rate.

My investments are composed of three main investments:

VFV (Vanguard S&P 500 US Index ETF)
XIU (iShares S&P/TSX 60 Index ETF)
VIU (Vanguard FTSE Developed all caps ex North America)

Plus other individual stocks that mostly lose me money. Continue Reading…