Often neglected in favour of their more exciting equity cousins, Canadian Dividend funds are staple investments that deserve to be considered by most investors. Among other benefits, funds in this category offer bear market resistance and performance stability that is generally better than that of other equity categories.
The benefits of these yield-generating, relatively stable funds came to the fore during the nasty market conditions of the last three years, as the category median's 7.7% annualized return was significantly better than the -2.3% performance posted by the median Canadian Equity category fund. In fact, the Canadian Dividend category was the top performing non-sector specific equity category during this period.
Canadian dividend funds tend to be less volatile than funds in other equity categories due to the types of companies they invest in. Companies that issue dividends—paying out a chunk of the profits—tend to be those that are more solidly established than those plowing their profits back into the company to achieve growth. These income payouts, plus any capital gains of the stocks, both contribute to the total return of the fund.
As a result of investing in these types of companies, Canadian Dividend funds have historically outperformed the broader based S&P/TSX Composite Index during down markets. But for the same reasons, these funds have also tended to trail the benchmark during up markets.
Meet the players
With over $23 billion in assets among 102 funds at the end of 2002, the Canadian Dividend category is top heavy as the five largest funds account for over half the category's assets. Largest among them isInvestors Dividend with nearly $6 billion in assets, which is more than twice the size ofRoyal Dividend's $2.3 billion.
Five Largest Canadian Dividend Equity Funds (as at Dec. 31, 2002)
| Fund and Morningstar Rating | Assets($ Mil) | Incpt | MER % | 1 Yr Ret | 3 Yr Ret | 5 Yr Ret | 10 Yr Ret | Min Invest $ |
Investors Dividend | 5,803 | Mar 61 | 2.95 | -0.2 | 7.5 | 4.2 | 8.8 | 1,000 |
Royal Dividend | 2,292 | Jan 93 | 1.84 | -0.5 | 10.1 | 6.9 | n/a | 1,000 |
BMO Dividend | 1,452 | Oct 94 | 1.86 | -1.8 | 10.8 | 8.2 | n/a | 500 |
| PH&N Dividend Income Series A | 1,389 | Jun 77 | 1.16 | -7.2 | 14.6 | 10.1 | 16.5 | 25,000 |
| Scotia Canadian Dividend | 881 | Dec 92 | 1.21 | -2.50 | 8.3 | 6.1 | 11.4 | 500 |
Top performing funds in this category includePH&N Dividend Income Series A. It has the best annualized track record among Canadian Dividend funds over the last 10 and 15 years, but it also comes with a hefty $25,000 minimum investment requirement.IA Dividends has been a first quartile performer in each of its first four years of existence and is more accessible at a $100 minimum investment. Mavrix Dividend & Income has been the only other fund, along with IA Dividends, to rank in the category's top quartile in each of the last three calendar years.
Funds with the highest average dividend yield includeRenaissance Canadian Dividend Income, which has a 4.27% yield and the Maritime Life Dividend Income series of funds (A,B andC,) each of which has a 3.65% yield (as of December 2002).
How have they performed?
For the 10 year period ended December 2002, the median Canadian Dividend fund gained 153% while the more broadly invested median Canadian Equity fund advanced by only 120%. This translates into an annualized return of 9.1% for dividend funds versus 8.3% for the latter. The TSX 35 Index returned 198% over the same period compared to the S&P/TSX Composite's 138%. The ride for Canadian Dividend fund investors has been smoother as well as these funds have generally been much less volatile than their more widely held counterparts.
Five star Canadian Dividend funds (all data as at Dec. 31, 2002)
| Five Star Funds | Assets($ Mil) | Incpt | MER % | 1 Yr Ret | 3 Yr Ret | 5 Yr Ret | 10 Yr Ret | Min Invest $ |
| BMO Dividend | 1452 | Oct 94 | 1.86 | -1.8 | 10.8 | 8.2 | n/a | 500 |
| PH&N Dividend Income Series A | 1,389 | Jun 77 | 1.16 | -7.2 | 14.6 | 10.1 | 16.5 | 25,000 |
| National Bank Dividend | 214 | Aug 92 | 1.73 | 1.8 | 9.7 | 7.5 | 8.5 | 500 |
| Empire Elite Dividend Growth | 67 | Jan 98 | 2.70 | -1.5 | 11.9 | n/a | n/a | 500 |
| Canada Life Gen Enchanced Dividend (Laketon) | 64 | Nov 98 | 2.35 | 3.5 | 13.1 | n/a | n/a | 1,000 |
| Mavrix Dividend & Income | 36 | Sep 85 | 2.23 | 8.1 | 17.8 | 8.0 | 7.7 | 500 |
| IA Dividends | 2 | Jan 98 | 2.50 | 0.3 | 12.1 | n/a | n/a | 100 |
Worth Noting
- Not all dividend funds are alike. Some funds are managed to maximize dividend yields while some others are managed to capture capital gains among dividend paying equities. Funds in the first group tend to have more stable returns while funds in the latter tend to have performances that are either near the top or the bottom of the category.
- Dividend income qualifies for a 13.3% tax credit when held in a non-registered account. Investors with registered and non-registered accounts may wish to maximize this benefit by receiving dividend income in their non-registered account. However, as dividends are not the only source of income for some funds, it is important to look into the tax implications when selecting individual funds.
- The median MER charged for a fund in this category is 2.40% with the majority of funds charging MERs between 2% and 2.9%. As with nearly all fund categories, the funds with the lower MERs tend to be the better performers.
- Over the last five years, funds in this category have demonstrated a high performance correlation with funds in categories that focus on Canadian equities, especially large-caps, and financial services. Funds from the Foreign Bond and Alternative Strategies categories have historically had an offsetting effect with this category.
- As companies from the financial and utilities sectors tend to have the highest dividend yields, funds from this category tend to have large allocations towards these two sectors relative to the broader market. By the same measure, these funds also tend to be underweighted in the energy and information technology sectors. Investors should take these biases into account when constructing their portfolios.
- The two stocks held by the most fund in the category are Royal Bank of Canada (RY/TSX) and BCE Inc. (BCE/TSX). But the five most widely held stocks based on the total market values of all stocks held in dividend funds are all five the Big Five banks.
- The amount companies issue as dividends varies and is generally not guaranteed. As a result, a fund's yields may differ from what it has distributed in the past.
Suitability
Dividend funds offer investors tax-efficient income at volatility levels that are typically lower than those of conventional equity funds. Dividend funds are excellent candidates for the core position in most portfolios and especially in those that are not tax-advantaged accounts.
See also:
All the funds in the Canadian Dividend category.
Morningstar Canadian Dividend Index returns.
Recommended reading:
Mutual Funds 107: Finding a fund's total return, or How much money am I really making?
Stock Strategist on companies that pay dividends.
(All data and Morningstar Ratings as of Dec. 31, 2002.)
No statement in this article should be construed as a recommendation to buy or sell securities or to provide investment advice or individual financial planning. Morningstar Canada does not provide specific portfolio advice and recommends the use of a qualified financial planner when appropriate.
