Buy this ETF for income

Exchange-traded funds (ETFs) offer low management fees. That lets you keep more yield for yourself when you invest in ETFs that focus on higher dividends. Here’s one high dividend-paying ETF we like.

IShares Core S&P/TSX Composite High Dividend Index ETF (TSX─XEI) is an exchange-traded fund that tries to match the return of the S&P/TSX Equity Income Index, minus expenses.

The fund’s top holdings include BCE Inc. (telecommunications), 5.1 per cent; TransCanada Corp. (energy), 5.1 per cent; Canadian Imperial Bank of Commerce (financials), 4.9 per cent; Bank of Nova Scotia (financials), 4.9 per cent; Potash Corporation (materials), 4.7 per cent; Shaw Communications (consumer discretionary), 4.6 per cent; Pembina Pipeline (energy), 4.0 per cent; Brookfield Renewable Energy (utilities), 3.0 per cent; and Inter Pipeline (energy), 2.7 per cent. Altogether, the fund holds 76 securities.

The fund’s industry breakdown is as follows: financials, 29.6 per cent; energy, 28.8 per cent; utilities, 12.1 per cent; consumer discretionary, 8.6 per cent; materials, 7.7 per cent; telecommunications, 7.2 per cent; health care, 2.6 per cent; industrials, 1.4 per cent; consumer staples, 1.2 per cent; and cash, 0.8 per cent.

Energy sector exposure is limited

The high 28.8-per-cent weighting in the energy sector may cause some investors to avoid this fund. The good news, however, is that the fund’s sector exposures are limited to 30 per cent to reduce sector-concentration risk. Then too, we believe that stocks like TransCanada, Pembina and Inter Pipeline offer the potential for attractive long-term total returns if you have the patience and tolerance to withstand further near-term volatility.

iShares Core S&P/TSX Composite High Dividend ETF was launched in April 2011. Since then, the fund has delivered a lackluster compound annual growth rate of 1.9 per cent. Its three-year annualized return of 1.4 per cent, and its 14.7-per-cent loss last year, has also been disappointing.

But contrarian investors may find some appeal in these numbers, as they signal that many of the stocks in which the ETF invests are currently out of favour. And that could well result in above-average capital gains in the years to come.

Meanwhile, the management expense ratio is a low 0.21 per cent, which further improves return potential.

This top dividend paying ETF yields 6.2 per cent

And in case you want to see some of those returns now, the fund’s current distribution yield of 6.2 per cent should satisfy your desire. Currently the fund pays a monthly distribution of $0.08594 and its net asset value per unit is $16.68.

Keep in mind, though, that there may be some downward pressure on that distribution in the near term as it seems likely that many energy companies will continue to reduce their dividends in 2016. But that downward pressure should at least be partly offset by rising dividends in other areas of the market, such as the financials, utilities and consumer sectors.

Aside from energy stocks, some of the fund’s holdings may surprise to the upside in 2016. The banks, for example, now trade at very attractive valuations, and may generate investor interest even on the back of modest earnings growth this year.

iShares S&P/TSX High Dividend ETF is a buy for income and capital appreciation if you can tolerate some extra risk.


Money Reporter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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