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Objective research, analysis, and insight on investment funds in Canada from an acknowledged industry expert  

By Dave Paterson  | Wednesday, March 08, 2017


In Canada, it has been shown that over time, roughly 65% to 70% of the total return of equities comes from reinvested dividends. That makes for a very compelling case to have dividend stocks a key part of your portfolio. With that in mind, I reviewed a number high-quality, dividend-focused exchange-traded funds (ETFs). The FundGrade A-Grade-rated PowerShares Canadian Dividend ETF (TSX: PDC) stood out as pretty attractive relative to its peers.

The ETF invests in highly liquid Canadian stocks that have paid a stable or rising dividend over the past five years. It screens for dividends, and then holds the 45 largest stocks ranked by market capitalization. The fund tracks NASDAQ Select Canadian Dividend Index, an adjusted market-cap index, which means it will make adjustments as needed to make sure one or two companies don’t dominate the portfolio. The index is reconstituted each year and rebalanced on a quarterly basis.

I prefer this PowerShares ETF over the competing iShares S&P/TSX Canadian Aristocrats Index ETF (TSX: CDZ) for a few reasons. PDC tends to focus more on larger names than CDZ, which is reflected by an average market cap that is nearly four times larger. The valuation and forward-looking earnings numbers also appear more favorable for PDC, giving it the edge for long-term growth potential.

The 4.5% dividend yield of PDC is also slightly higher than the 3.8% for CDZ, allowing investors to receive a higher income while they wait for stock price appreciation. Costs for PDC are also slightly less, with an MER of 0.55%, 12 basis points lower than the 0.67% MER posted for CDZ.

My big concern with PDC is its concentration in financials. As of March 3, it held more than 43% in financials, including more than 8% weighting in each of the top three holdings of Royal Bank of Canada (TSX: RY), Canadian Imperial Bank of Commerce (TSX: CM), and Bank of Nova Scotia (TSX: BNS). Another 13% of the portfolio is weighted to real estate investment trusts (REITs). The risk here is the potential impact to the banks if we see a meaningful slowdown in the Canadian housing market. More than 30% of the fund is directly invested in the banks, compared with a little more than 10% in CDZ.

Still, after my review, I see the PowerShares Canadian Dividend ETF as the most attractive dividend option in the near to medium term.

PowerShares Canadian Dividend ETF
Ticker symbol:
Fund company:
PowerShares Canada
Fund type:
Canadian Dividend & Income Equity
FundGrade Rating: A (January)
FundGrade A+ Award: 2014
Style: Large Cap Value
Risk level: Medium
RRSP/RRIF suitability: Good
Manager: PowerShares Management Team
MER: 0.55%

Dave Paterson, CFA, is the Director of Research, Investment Funds for D.A. Paterson & Associates Inc., a consulting firm specializing in providing research and due diligence on a variety of investment products. He is also the publisher of Dave Paterson’s Top Funds Report, offering regular commentary and in-depth analysis of Canada’s top investment funds. He uses a unique analytical approach to identify funds with strong, risk-adjusted returns, and regularly publishes his insights and analyses in Fund Library.

Notes and Disclaimer

© 2017 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

Commissions, trailing commissions, management fees and expenses all may be associated with fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. This article is for information purposes only and is not intended as personalized investment advice.


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