Four things that surprised me about dividend ETFs while researching them for the 2016 edition of the Globe and Mail ETF Buyers' Guide:
1.) Distributions vary a lot on an annual basis: When you hold a portfolio of well-chosen dividend growth stocks, the total amount of dividends received should rise each year. Some stocks may not come through with dividend increases, but most will. Net result: You have a steadily rising stream of dividend income. With dividend ETFs, the monthly and annual amounts may vary. You may find you actually receive less one year than you did previously. Be sure to check a dividend ETF's distribution history to see how variable distributions are on an annual basis.
2.) The amount of actual dividends varies a lot: Monthly or quarterly payouts from dividend ETFs may consist of eligible dividends (from big corporations) as well as a return of capital. Annualized distributions may also include reinvested capital gains. Again, check an ETF's dividend history to see what your distributions are made of. In a taxable account, you'll probably want to max out on eligible dividends because of the tax advantages.
3.) Yields vary a lot: ETF returns are typically shown on a total return basis, which means dividends plus changes in share price. The fund with the best total return might not be the right one for you, though. If you're primarily interested in dividend income, check out higher yielding dividend ETFs. Be sure to look at portfolio quality – are they generating higher yields with lower quality dividend stocks that might have to cut their payouts?
4.) Recent returns from Canadian dividend ETFs have been quite lame: Some individual dividend stocks have done well lately, but the portfolios that most of these ETFs hold have lost money for the most part in the 12 months to April 30. And that's on a total return basis. Without dividends, returns would have been even worse. Consider these losses a reminder that dividend stocks are not special. They have done brilliantly for the most part in the past five years, but can and will lose money at times. Another lesson here is that you shouldn't care about declining ETF prices if your primary goal is dividend income. While payments do vary, as noted above, dividend ETFs can be relied upon to deliver the cash every month or quarter.
Catch up on the Globe and Mail ETF Buyer's Guide:
-Canadian equity
-U.S. equity
-Canadian bond
-International/global
-Canadian dividend and income
-Global dividend and income (coming this Saturday)