# Could ZCN be the best dividend ETF?



## james4beach (Nov 15, 2012)

The yield on the broad TSX Composite (and TSX 60) is getting pretty high.

ZCN (BMO's TSX Composite ETF) portfolio yield on April 12 was 3.22%. After fees this becomes 3.22 - 0.18 = *3.04% yield after MER*

And the market is even lower today which means the yield is higher than 3.04%. That seems pretty good to me... if you're a dividends addict, surely just holding the TSX is pretty good? It's nearly entirely eligible dividends... 94% of the distribution is eligible dividends.

Compare this to say CDZ, which yields 3.27% - 0.67% MER = 2.6% yield (much worse than ZCN or XIU!) and only 49% of CDZ's distribution is eligible dividends.

XDV has 4.30% - 0.55% MER = 3.75% yield after MER, which is a bit higher than ZCN. But XDV is very heavy in the financial sector, and only 54% of its distribution is eligible dividends


----------



## andrewf (Mar 1, 2010)

How about FXM? Its index yields 2.61% less the MER of 0.6%. It has, however, outperformed XIU by about 11% in the last 12 months, and 5% in the last month alone. It's actually outperformed all these ETFs...

If you're going to use a non-cap weight index, why not use one that seems to have done something useful?


----------



## james4beach (Nov 15, 2012)

> If you're going to use a non-cap weight index, why not use one that seems to have done something useful?


You mean ZCN? Isn't it exactly the TSX Composite Index, or did I misunderstand what ZCN is?

I'm quite interested in the TSX Composite or TSX 60 because those indexes underpin most Canadian investors' portfolios anyway. And if they happen to yield as much as 3%, that seems like a sweet deal... two birds with one stone, right? You don't even need a separate investment for dividend yield.

With something like FXM (or indeed XDV, CDZ, ZDV etc) you're putting a lot of faith in that specific uncommon index. Plus the high MERs.

The performance isn't a guarantee; the loss due to MER is, however!


----------



## james4beach (Nov 15, 2012)

andrewf said:


> How about FXM?


Criticisms of FXM: they only have $6 million in the fund (this is very tiny), usually trade barely a few thousand shares in a day, and you're paying them over 0.60% MER to hold just 29 stocks. I don't see what justifies that MER. If it was a larger fund and more liquid, maybe... but if you like this fund, just hold the underlying shares directly. Keep an eye on their web page and adjust your holdings to mirror the fund, and you will pay much less than their MER.

More criticisms: 0.6% is the management fees, but that's not the MER (same way BMO says management fees but the MER is actually higer). The way it works is it means they limit the management fee to 0.6%, but there are other fees on top.

The MER is actually much higher: *0.70%* and that's your real problem. Don't invest in this fund.

This is shown in the financial statements, which you are reviewing right?? Just kidding - nobody reads financial statements. Here is how the fund fees breakdown:

Management fee: 27,354 or 0.49%
Dealer service fee: 6,832 or 0.12%
Other operating expenses: 4,444 or 0.08%

In total you're looking at 0.70% MER, brother. That's VERY high.


----------



## andrewf (Mar 1, 2010)

You can try to replicate the fund yourself, but even if you don't the performance blows these dividend funds away. Also has the side benefit of index construction that gives a more sensible sector weight. FXM is not pure buy and hold, so replicating it is not as simple as 30 buys. To replicate the index at 30 holdings * 4 rebalance points per year * $10 = $1200 per year, with a breakeven point of $200,000. This assigns no value to your time for: calculating the trades necessary, executing the trades, and calculating ACB. 

In other words, I see no reason to hold a divvy fund. If you're not going to use XIU, FXM makes more sense to me than any of these dividend funds.


----------



## james4beach (Nov 15, 2012)

See my edit to the post... real problem is FXM's hidden fees, and its massive 0.70% MER


----------



## james4beach (Nov 15, 2012)

"If you're not going to use XIU..." I get your point, but isn't ZCN just as good as XIU? That's what I'm getting at. ZCN or XIU track the general indices.

So if ZCN (or XIU)'s dividend yield is so high, then why bother with a dividend fund? You can get your dividends with the low MER broad indices.


----------



## andrewf (Mar 1, 2010)

I take your point. Even at a MER of 0.7 (and CDZ has a MER of 0.67), the breakeven point would be $171k and higher if you value your time. It would be great if the fee were a bit lower, I'll grant you.

I would caution that the fund was new in 2012, and costs borne by the fund may have been higher that year than it would be going forward.

In essence, both dividend and value funds are trying to capture the same factor: value. Dividend funds do it by using a proxy for value, dividend yield. Value, as a factor, has historically provided some alpha, which helps to offset the higher MER of these funds.


----------



## james4beach (Nov 15, 2012)

andrewf said:


> How about FXM? Its index yields 2.61% less the MER of 0.6%. It has, however, outperformed XIU by about 11% in the last 12 months, and 5% in the last month alone. It's actually outperformed all these ETFs...


So it's actually 2.61% - 0.70% MER = 1.91% yield after MER
That's compared to approx 3% post-MER yield on XIU or ZCN

You make a valid point about current performance of FXM. But as a long term holding what are the odds it will continue outperforming the benchmark, and does it justify the huge 0.70% MER?


----------



## CanadianCapitalist (Mar 31, 2009)

It's Andrew who pointed me to FXM and I agree that it follows a sounder methodology than dividend etfs. However caution is warranted if one is considering FXM for a non-registered account because (1) it is tiny, so there is a chance that it could close (2) the methodology can be expected to generate much higher turnover than the broad index, so (3) one has to wonder if the fee and tax drag will be overcome by expected higher returns.


----------



## andrewf (Mar 1, 2010)

I was surprised that the fund distributed no CGs for 2012, but it did distribute some ROC (~36% of total distributions).

I agree that caution is warranted, CC.


----------



## james4beach (Nov 15, 2012)

I'll actually agree that this fund looks like a nice, plain vanilla (i.e. uncomplicated) ETF and those are all good features. As are the weightings and quality of holdings.

But that tiny size, terrible liquidity, and high MER are really a problem. The expense ratio may have been large last year because as mentioned, it's a new fund. I would watch closely and wait a full year to see whether

a) They stop incurring those extra fees on top of the quoted mgmt fee (I mean wow, they have 0.2% in hidden fees last year)
b) The fund grows... because $6 million is tiny
c) Liquidity improves
d) Outperformance continues


----------



## james4beach (Nov 15, 2012)

But still guys, really? You would really take a new, tiny, untested fund that yields a full 1% less than XIU, over good old XIU?


----------



## james4beach (Nov 15, 2012)

CanadianCapitalist said:


> (2) the methodology can be expected to generate much higher turnover than the broad index


OK so if it's high turnover by nature, then those extra fees I listed are probably permanent as they sound like they're associated with the brokerage and transactions.

The question you've got to ask yourself is whether you're willing to pay 0.5% more MER a year than XIU, on the gamble that this new tiny fund will continue outperforming. Of course that's an individual decision based on how much confidence you have in this fund's management and their methodology, reliability, and skill to do their jobs... maybe that's worth +0.5% MER


----------



## CanadianCapitalist (Mar 31, 2009)

No. Turnover will generate costs that are in addition to MER because brokerage commissions are extra expenses paid by the fund other than MER. A 0.70 percent estimate for MER sounds about right because you can estimate MER from management fees by tacking on about 13 percent in HST.


----------



## james4beach (Nov 15, 2012)

I see, so those are always in excess of the management fee.

The 0.70% comes directly from the 2012 results. Total expenses paid in 2012 divided by year-end net asset value = 0.70%. The caveat to this number is in case there are big fund inflows/outflows near the year end. Ideally you would calculate using average net assets, as expenses trickle throughout the year of course.


----------



## andrewf (Mar 1, 2010)

1) I'm not concerned about liquidity. ETF liquidity is often misunderstood. What matters more than the volume or size of the fund is the liquidity of the underlying assets. I've managed to trade this fund at the NAV, no problem. Just use a limit order (and you should always use limit orders).

2) I don't care about yield, so no, I don't mind the yield being lower than XIU.

3) I'm not sure I would say the turnover is 'high'. It's probably higher than most dividend funds, but lower than many active MFs. Many of the holdings have been there since the fund started a year and a bit ago.

4) Regarding outperformance of the index. This index has been around for a while under CPMS. It's hard to dismiss accusations of data mining, but this index has provided out-performance in out of sample conditions (ie, since the fund launched, at the least).

Time will tell of course. If you held over the past year, this fund has paid for its MER differential for the next 20 years vs XIU. I also hold XIU, but I like this fund as it helps to round out my Canadian exposure, which is too heavy in financials and energy/materials.


----------



## james4beach (Nov 15, 2012)

Those are reasonable ways of looking at it. I haven't studied their methodology, but perhaps it is superior. Certainly possible that it's worth the high MER.

The thread started just to point out that the broad market index yields 3.0%. Since people get so excited about stock dividend yields, I thought it would interest the yield-chasers to know that the TSX index itself offers very strong dividends.


----------



## andrewf (Mar 1, 2010)

Sorry to hijack your thread. I guess I just can't wrap my head around buying something for yield when most of the return does not come from yield.


----------



## james4beach (Nov 15, 2012)

andrewf: we're really in the same boat. I don't understand buying something purely for yield either although I can sympathize with that reasoning.

There are many of this forum who look at the dividend yield as a very important metric. For them, I think it's good news that XIU / ZCN itself has a strong dividend yield at 3% and I would say that makes a stronger point of sticking to the index, instead of finding exotic dividend ETFs.


----------



## Squash500 (May 16, 2009)

james4beach said:


> andrewf: we're really in the same boat. I don't understand buying something purely for yield either although I can sympathize with that reasoning.
> 
> There are many of this forum who look at the dividend yield as a very important metric. For them, I think it's good news that XIU / ZCN itself has a strong dividend yield at 3% and I would say that makes a stronger point of sticking to the index, instead of finding exotic dividend ETFs.


 Hi James...when your semi retired like I am at 51 years old then you need to buy some ETFS for yield and monthly income. That's why I'm personally a big fan of XTR, CPD, XRE, and XDV. I'm not that thrilled with buying XIU because of it's high exposure to energy and materials. I know I'm repeating myself from a previous thread---LOL.

I understand that you and Andrew probably are much younger than I am ....and have high paying jobs etc. However I don't. I bought XTR and CPD purely for yield (monthly income) in my non-registered account. I personally hate buying GICS and Bonds....especially in this low interest rate environment.


----------



## james4beach (Nov 15, 2012)

Squash500 said:


> Hi James...when your semi retired like I am at 51 years old then you need to buy some ETFS for yield and monthly income. That's why I'm personally a big fan of XTR, CPD, XRE, and XDV. I'm not that thrilled with buying XIU because of it's high exposure to energy and materials. I know I'm repeating myself from a previous thread---LOL.


Hi Squash, yes I can understand where you're coming from. Those things you list are good vehicles (and convenient) for delivering cashflow, as long as you understand where it comes from.

You may not be thrilled with those risky sectors in XIU, but you're taking on a lot of risk yourself with XTR (corps and junk bonds), XRE (leveraged REITs) too. I don't know which is riskier.

With XTR for instance, internally they are liquidating holdings to provide some of that cash. The Monthly Income Funds all do this. Functionally it would be the same as holding XIU and selling off some shares ... absolutely no difference. Except I presume that it's more convenient for you to receive them in distribution form.

But just understand that under the hood, the same thing is happening. If I hold say XIU & XCB (oversimplifying), and you hold XTR, both of us are getting the same total return.

The only difference is that XTR is paying you out the wealth in distribution form, whereas I am selling shares of XIU & XCB to realize that wealth.


----------



## Squash500 (May 16, 2009)

james4beach said:


> Hi Squash, yes I can understand where you're coming from. Those things you list are good vehicles (and convenient) for delivering cashflow, as long as you understand where it comes from.
> 
> You may not be thrilled with those risky sectors in XIU, but you're taking on a lot of risk yourself with XTR (corps and junk bonds), XRE (leveraged REITs) too. I don't know which is riskier.
> 
> ...


James you make excellent points as usual. It is way more convenient for me to receive the monthly income in distribution form. I also realize that XTR and XRE are quite risky. However I follow the market everyday....and if the XTR and XRE start dropping rapidly in price (which is quite possible) ....then I'll pull the trigger and sell some shares etc.


----------



## thenegotiator (May 23, 2012)

nice thread.
everybody gets along .
everybody expresses their points and nobody is an egocentric at this thread.
i am enjoying reading it, even though i do no trade those vehicles.
maybe i can learn something here.
is this the couch potato approach that everyone talks on CMF?
no pun intended... puhleaze Harold.
thks


----------



## thenegotiator (May 23, 2012)

question for james.
why would i buy xcb at these levels?
TIA


----------



## james4beach (Nov 15, 2012)

Squash500 said:


> James you make excellent points as usual. It is way more convenient for me to receive the monthly income in distribution form. I also realize that XTR and XRE are quite risky.


No problems there. And yes I agree that distributions of say XTR are a very convenient vehicle to deliver regular cash. Another one I actually like is the CIBC Monthly Income fund. As far as mutual funds go, it's a nice balanced fund (I fundamentally like what they hold) and they also use return of capital to boost the distribution, like XTR.

One high yield ETF that I do actually hold is ZUT (equal weight utilities). The main reason being that the broad index doesnt have much utilities exposure, and I wanted some. It does have quite a large distribution as well but many of its holdings have unsustainably high distributions. I expect ZUT's distributions to drop


----------



## james4beach (Nov 15, 2012)

thenegotiator said:


> question for james.
> why would i buy xcb at these levels?
> TIA


Oh I should have been more careful to say that's a hypothetical. I don't hold XCB and would not buy it here. I used XIU & XCB as an example, a proxy to draw a parallel to XTR which is kind of similar.


----------



## thenegotiator (May 23, 2012)

for james.
so basically how many times a year do u rebalance one's portfolio/
i mean ur clients or urself


----------



## thenegotiator (May 23, 2012)

nice talking to you boys.
u can answer that later james .
i will be around.
dog stay away from the crimex brother.
the ape is off ur back right?
cheers


----------



## james4beach (Nov 15, 2012)

thenegotiator said:


> for james.
> so basically how many times a year do u rebalance one's portfolio/
> i mean ur clients or urself


Client accounts typically have between 2 and 4 trades a year... we're talking about $40 max in commissions incurred a year. Very little activity.

My own portfolio has about 1 stock trade + 1 bond trade a quarter.


----------



## andrewf (Mar 1, 2010)

I think it would be a public service to clearly articulate why cash from distributions are not better or different than cash from sale proceeds. You do not need yield to generate income. I've tried and failed, and it seems like many people are stuck on this idea of someone else breaking off a piece of their investments and giving them cash, versus themselves breaking off a piece and getting cash.


----------



## james4beach (Nov 15, 2012)

andrewf said:


> I think it would be a public service to clearly articulate why cash from distributions are not better or different than cash from sale proceeds. You do not need yield to generate income. I've tried and failed


I also don't have a great way to describe it. The two best resources I can suggest are that moneysense article, "The income illusion" and Buffett's description in this annual report (PDF) page 19, under the heading "Dividends". Read that!

Until a few months ago, I didn't understand this either. Those two articles convinced me. I've thought about it quite a bit... and I think they're right. Though I think Buffett makes a little too strong a point of it (as he is defending BRK's no dividends policy).

But speaking on fundamentals of company's equity and total returns, I agree


----------



## james4beach (Nov 15, 2012)

I still want some dividends though for more practical reasons. To word it crudely, here is what I would say to a company: "Sure you guys seem like great executives and everything, and you probably will reinvest the earnings well and grow the company... but just in case you're full of **** or your accountants are inept, I still want 10% of the earnings paid out to me in cash dividends"


----------



## andrewf (Mar 1, 2010)

You could accomplish the same thing by selling 10%*(earnings yield) of your position each year.


----------



## CanadianCapitalist (Mar 31, 2009)

james4beach said:


> To word it crudely, here is what I would say to a company: "Sure you guys seem like great executives and everything, and you probably will reinvest the earnings well and grow the company... but just in case you're full of **** or your accountants are inept, I still want 10% of the earnings paid out to me in cash dividends"


If one does not trust management to make intelligent capital allocation decisions, why even invest in the stock in the first place? Dividend payouts don't even come close to the amount of capital that one typically invests in a stock.


----------



## james4beach (Nov 15, 2012)

CanadianCapitalist said:


> If one does not trust management to make intelligent capital allocation decisions, why even invest in the stock in the first place? Dividend payouts don't even come close to the amount of capital that one typically invests in a stock.


I think of it like insurance because you can never have full and total faith. Stock prices are ethereal and can change radically in the blink of an eye. Perhaps the management is great, but something else internally blows up -- accounting fraud, for instance. This seems to happen with alarming regularity in the corporate world.

Regarding dividend payouts being nowhere near the purchase cost... I think dividends [or equivalent liquidated value] add up to quite a bit over time if we're talking a few decades. Say it's a $100 stock that pays $3 in yearly dividends. In 30 years you've received 90% of initial cost. Ignoring many things of course but it seems to add up to a lot.

Say you hold something like Berkshire Hathaway, and aren't receiving dividends or selling shares. You hold it for 30 years and watch great management, great business activity, huge profits... and then something unforseen happens (accounting fraud, or maybe their derivative positions blow up and incur massive losses). The stock plummets or gets wiped out. What do you have to show for 30 years of holding it through great times?

In comparison, being paid a dividend each year means you're getting some of that profit without waiting 30 years. As andrewf says, though, you still get the same thing by selling shares... which is exactly what Buffett says he personally does.


----------



## Four Pillars (Apr 5, 2009)

james4beach said:


> I think of it like insurance because you can never have full and total faith. Stock prices are ethereal and can change radically in the blink of an eye. Perhaps the management is great, but something else internally blows up -- accounting fraud, for instance. This seems to happen with alarming regularity in the corporate world.


You have a misguided notion of what insurance is. If a company runs out of money (for whatever reason), the dividends will not be paid. That's not insurance.

The closest thing to 'insurance' is to diversify among more companies.


----------



## james4beach (Nov 15, 2012)

Four Pillars said:


> You have a misguided notion of what insurance is. If a company runs out of money (for whatever reason), the dividends will not be paid. That's not insurance.


I'm talking over TIME. If the company blows up, you've received cash via dividends for the X years you've held the stock up to the point they blow up. Of course the dividends stop when it blows up, but you've already collected money in those X years.

If you haven't been paid dividends, then at the point it blows up you have lost everything.


----------



## Eclectic12 (Oct 20, 2010)

andrewf said:


> You could accomplish the same thing by selling 10%*(earnings yield) of your position each year.


Is that true in practice though? 

Even if management is selling off assets, where they have to pay a commission - there should be economy of scale that the individual has a hard time matching.

The main exceptions that come to mind are either a TD eSeries index fund held through the bank or ETFs that are commission free at the brokerage. 


Cheers


----------



## andrewf (Mar 1, 2010)

If you're worried about company specific risk, the answer is not dividends, it's diversification.


----------



## Squash500 (May 16, 2009)

andrewf said:


> I think it would be a public service to clearly articulate why cash from distributions are not better or different than cash from sale proceeds. You do not need yield to generate income. I've tried and failed, and it seems like many people are stuck on this idea of someone else breaking off a piece of their investments and giving them cash, versus themselves breaking off a piece and getting cash.


 I look at this differently. Everytime you sell shares in a non-registered account your creating a deemed disposition event. IMHO either a capital gain or capital loss. What's the point? It's often easier (from a tax perspective) just to get cash from distribution income....and hold on to your ETF shares.

Also I would get irritated holding ETFS or individual stocks that don't pay some sort of dividend or other form of income. Why hold an ETF or individual stock (that doesn't pay a dividend etc) for 30 years and let my beneficiaries get all the benefits---LOL. In all seriousness...I don't have to worry about leaving my estate to anyone....as I have no children and not married etc.


----------



## andrewf (Mar 1, 2010)

There are tax implications whether you are selling or getting distributions.

And were I trying to generate income, I would sell perhaps once or twice a year, and sell overweight assets in my portfolio. The proceeds go to the savings account and are drawn down weekly/monthly whatever for expenses. You don't need to sell a share every month.

A lot of this is just mental arithmetic. People are irrationally averse to selling part of their investment. They'd be pleased as punch to get a 20% distribution and have the value of the asset decline away to nothing, as long as they didn't have to click the sell button. This is why high-fee ROC managed payout funds are so popular. You're paying someone thousands of dollars a year to click that sell button for you.


----------



## Four Pillars (Apr 5, 2009)

andrewf said:


> There are tax implications whether you are selling or getting distributions.
> 
> And were I trying to generate income, I would sell perhaps once or twice a year, and sell overweight assets in my portfolio. The proceeds go to the savings account and are drawn down weekly/monthly whatever for expenses. You don't need to sell a share every month.
> 
> A lot of this is just mental arithmetic. People are irrationally averse to selling part of their investment. They'd be pleased as punch to get a 20% distribution and have the value of the asset decline away to nothing, as long as they didn't have to click the sell button. This is why high-fee ROC managed payout funds are so popular. You're paying someone thousands of dollars a year to click that sell button for you.


+1


----------



## Squash500 (May 16, 2009)

andrewf said:


> There are tax implications whether you are selling or getting distributions.
> 
> And were I trying to generate income, I would sell perhaps once or twice a year, and sell overweight assets in my portfolio. The proceeds go to the savings account and are drawn down weekly/monthly whatever for expenses. You don't need to sell a share every month.
> 
> A lot of this is just mental arithmetic. People are irrationally averse to selling part of their investment. They'd be pleased as punch to get a 20% distribution and have the value of the asset decline away to nothing, as long as they didn't have to click the sell button. This is why high-fee ROC managed payout funds are so popular. You're paying someone thousands of dollars a year to click that sell button for you.


Fair enough. However for discipline purposes ...I prefer receiving my distribution income monthly...ie XTR, XDV, XRE etc. IMHO I think the MER's of the XTR, XDV, XRE etc are quite reasonable for what you get. Don't forget I'm not paying one of those $5000 Armani suit Bay Street financial advisors 2% + per year to manage my assets---LOL. I'm doing it totally myself with ETFS.


----------



## Sampson (Apr 3, 2009)

More of the 'get paid to wait' mentality.

From Larry Swedoe, posted by CC on his blog a few weeks ago.
Why-chasing-dividends-is-a-mistake


----------



## Squash500 (May 16, 2009)

Sampson said:


> More of the 'get paid to wait' mentality.
> 
> From Larry Swedoe, posted by CC on his blog a few weeks ago.
> Why-chasing-dividends-is-a-mistake


 IMHO this article is a little bit biased because Swedroe's firm uses DFA funds to construct client portfolios. Of course only financial advisors can buy DFA funds. What a surprise--LOL. I know for a fact that John Degoey uses DFA funds for his clients in Canada. Of course John Degoey charges his clients 2.5% per year for his financial advice.

As usual just my opinion but this article doesn't convince me of anything.


----------



## CanadianCapitalist (Mar 31, 2009)

Squash500 said:


> IMHO this article is a little bit biased because Swedroe's firm uses DFA funds to construct client portfolios. Of course only financial advisors can buy DFA funds. What a surprise--LOL. I know for a fact that John Degoey uses DFA funds for his clients in Canada. Of course John Degoey charges his clients 2.5% per year for his financial advice.
> 
> As usual just my opinion but this article doesn't convince me of anything.


Yep, it's true that Swedroe works for a company that charges for advice and build portfolios using DFA Funds. But DFA funds aren't the only way to capture small-cap or value premiums. An investor can slice-and-dice with widely-available ETFs too. That said, you shouldn't dismiss a study just because its authors may have a bias. The data points in the DFA study confirm the findings from other sources. The one I can think of is Triumph of the Optimists by Dimson, Marsh and Staunton, which relies on market data from 16 countries for the 1900-2000 period. It also found that the portion of the market that dividend paying stocks kept dropping during the latter half of the century. More importantly, it documented the volatility of a dividend income stream. Both findings are confirmed in the study that Swedroe writes about.


----------



## Squash500 (May 16, 2009)

CanadianCapitalist said:


> Yep, it's true that Swedroe works for a company that charges for advice and build portfolios using DFA Funds. But DFA funds aren't the only way to capture small-cap or value premiums. An investor can slice-and-dice with widely-available ETFs too. That said, you shouldn't dismiss a study just because its authors may have a bias. The data points in the DFA study confirm the findings from other sources. The one I can think of is Triumph of the Optimists by Dimson, Marsh and Staunton, which relies on market data from 16 countries for the 1900-2000 period. It also found that the portion of the market that dividend paying stocks kept dropping during the latter half of the century. More importantly, it documented the volatility of a dividend income stream. Both findings are confirmed in the study that Swedroe writes about.


Excellent response CC. Your point is well taken.


----------



## favelle75 (Feb 6, 2013)

What about ZDV? Higher yield, but likely also higher RoC. Thought I read an article recently where it was recommended over all other dividend ETF's.


----------



## thenegotiator (May 23, 2012)

james4beach said:


> Client accounts typically have between 2 and 4 trades a year... we're talking about $40 max in commissions incurred a year. Very little activity.
> 
> My own portfolio has about 1 stock trade + 1 bond trade a quarter.


thank you for the reply


----------



## thenegotiator (May 23, 2012)

james4beach said:


> I think of it like insurance because you can never have full and total faith. Stock prices are ethereal and can change radically in the blink of an eye. Perhaps the management is great, but something else internally blows up -- accounting fraud, for instance. This seems to happen with alarming regularity in the corporate world.
> 
> Regarding dividend payouts being nowhere near the purchase cost... I think dividends [or equivalent liquidated value] add up to quite a bit over time if we're talking a few decades. Say it's a $100 stock that pays $3 in yearly dividends. In 30 years you've received 90% of initial cost. Ignoring many things of course but it seems to add up to a lot.
> 
> ...


you completely lost me here or i am a total dumb ****.
first off buffett did not start his career with the stocks he owns now.
actually the old man took a lot of risk initially.
as an example out of many i can give.
do u actually fathom the idea that XOM one day will go bankrupt and simply disappear....i will bring to the table BP also after the oil spill.
i would like to hear ur opinion.
i will be honest with ya james.
if i had 1 million bucks in cash right now at my disposition .... alll of it would be placed in defensive stocks.... selected thoroughly.
cheers


----------



## eulogy (Oct 29, 2011)

I like ZCN. I was having a debate between VCE and ZCN and went with the BMO fund. But I'm not interested in the yield.


----------



## james4beach (Nov 15, 2012)

eulogy: yeah I think ZCN wins over VCE. It's the real TSX Composite Index for one... has a longer track record and a full year, which is always good. Volume on ZCN is also higher, though it's still a bit too low for my taste

Whether you want the yield or not, you're getting it... a full 3.0% dividend yield on the TSX Composite Index. Look at you, now you're a "dividend investor" too! lol


----------



## james4beach (Nov 15, 2012)

thenegotiator said:


> do u actually fathom the idea that XOM one day will go bankrupt and simply disappear....i will bring to the table BP also after the oil spill.
> i would like to hear ur opinion.
> i will be honest with ya james.
> if i had 1 million bucks in cash right now at my disposition .... alll of it would be placed in defensive stocks.... selected thoroughly.
> cheers


It is conceivable that XOM could lose a lot of value, from some unforseen event. Any stock can. I'll give you a scenario... let's say XOM gets out of the energy business, and becomes some kind of leveraged energy trading company (Enron-like). And then conducts a bunch of energy derivatives B.S. and runs itself into the ground.

This is more or less what happened to GE. Years ago it was a 'traditional' style business, manufacturer, etc -- the way that many of us still _picture _it. But that's not really what they do. They are a finance company, and were very heavily in the finance game in 2008. That's why the company virtually collapsed.

Now let's say you held XOM, or GE, for 30 years (one of the stocks you may buy with your $1 million). Which is better for you... (a) that is pays some dividends or (b) that is pays no dividends

In scenario (a) you are getting a slow trickle of value out of XOM over the years
In scenario (b), you don't get a dime from your XOM investment until you sell shares

Now what if in those 30 years, XOM slowly morphs into some ridiculous company (as GE has) and suddenly one day it collapses. For all those years of investment, you haven't gotten ANY return... unless you were regularly selling off some shares. At least with the dividend, without doing any work you're always getting some return.


----------



## andrewf (Mar 1, 2010)

james, getting dividends means nothing.

If you receive dividends and reinvest (DRIP), you get no value until you sell shares. Or, if you don't get dividends but sell x% of your shares each year to generate cash flow, are you really worse off?

There's nothing magic about dividends. You can always create cash flows from any liquid investment.


----------



## james4beach (Nov 15, 2012)

andrewf said:


> james, getting dividends means nothing.
> 
> If you receive dividends and reinvest (DRIP), you get no value until you sell shares. Or, if you don't get dividends but sell x% of your shares each year to generate cash flow, are you really worse off?
> 
> There's nothing magic about dividends. You can always create cash flows from any liquid investment.


The only 'magic' of dividends is that they happen automatically & regularly without any action being taken on your part. I agree that if you sell x% of your shares each year, that works too... I never disputed that selling shares is a good plan. But dividends are easier, and most people have a serious psychological hangup about selling shares.

I'm not a fan of DRIP. For me, dividends are all about getting some of the cash now. I wouldn't DRIP my dividends back. Lots of people invest in these high payout stocks and then DRIP their dividends back... what's the point of that?


----------



## HaroldCrump (Jun 10, 2009)

The theory that selling a % of shares every month/quarter/year to generate cash flow (in lieu of dividends) is good on paper, but seldom works out in practice.
The reason is that stocks do not have a linear growth path YOY.
There is no stock that grows at a certain % every day to enable an investor to execute such a strategy, esp. for retirement.

There are violent swings and upheavals for all stock prices, even for sleepy, solid blue chips such as the utilities and the banks.
An investor that is planning on selling a certain % of his/her shares every month to generate income will end up draining capital during market downturns.

When market eventually recovers, he/she will have far less shares than before and chances are the shares may not go back to previous valuation for several years.

No company can grow EPS along a linear path.
Even if EPS is growing, stock price does not always follow like a lamb quarter after quarter.

I am not making a case for fetish-worship of dividends, but saying that selling a % of your equities cannot be a reliable income generation strategy in practice.

A variation of this scenario is the commonly touted "withdrawal rate" argument for retirement portfolios (usually 3% or 4% withdrawal rate is used as example).
That argument similarly suffers from a sequence of returns risk.


----------



## james4beach (Nov 15, 2012)

HaroldCrump said:


> The theory that selling a % of shares every month/quarter/year to generate cash flow (in lieu of dividends) is good on paper, but seldom works out in practice.
> The reason is that stocks do not have a linear growth path YOY.
> . . .
> An investor that is planning on selling a certain % of his/her shares every month to generate income will end up draining capital during market downturns.


Well yes, the stocks don't linearly go upwards, I agree that's one problem.

But regularly selling shares means there will both be periods were you sell under-valued shares, and over-valued shares too. So you'll be selling both at depressed prices, and inflated prices. As long as you do it methodically and not just when you "feel" like selling, it will balance out


----------



## CanadianCapitalist (Mar 31, 2009)

HaroldCrump said:


> There are violent swings and upheavals for all stock prices, even for sleepy, solid blue chips such as the utilities and the banks.
> An investor that is planning on selling a certain % of his/her shares every month to generate income will end up draining capital during market downturns.


That's true but income streams from dividends are risky as well. Dividends can be cut (S&P 500 dividends were sharply lower after the 2008-09 crash, for example and are just now surpassing the previous peak set in ) or dividend growth may not keep pace with inflation which may mean tapping into capital resulting in a smaller income stream over time.


----------



## andrewf (Mar 1, 2010)

You can also opt to not sell shares in the middle of obvious market panics, like 2008/2009.


----------



## humble_pie (Jun 7, 2009)

ottomh i would guess that, for retail investors who held a quality stock portf, their dividend income streams during 2008/09 went down by noticeably *less* than the value of their portfs actually went down on paper ...

in other words they were able to ride out the period better than the party who had to sell some shares every month.

what i wonder would be the long-term taxation effect upon the investor who a) reinvests all dividends with no exceptions, & 2) regularly sells shares to obtain income? 

for one thing, he's obtaining most-favourable capital gains/loss tax status instead of 2nd-rung-slightly-less-favourable dividend tax credits. But long-term i haven't figured out what the effects might be.


----------



## Spudd (Oct 11, 2011)

If you reinvest dividends you still have to pay taxes on those dividends. So you'd have to pay both dividend tax and capital gains in that scenario.


----------



## HaroldCrump (Jun 10, 2009)

*@CC* - Yes, indeed dividends can be cut, even for so-called blue chips.
However, this argument works both way, i.e. a dividend cut usually comes fairly late in the downward spiral of a stock. 
By the time a dividend is cut, stock would already have lost 10%, 20%, 50%, or more value.
The plan to sell a certain % of shares periodically is already hosed by this time.

*@andrewf* - Yes, one could put a hold on share sales.
But that assumes that (a) investor has other sources to income to manage their expenses, and (b) market is expected to recover before the investor runs out of money (what did Lord Keynes say about markets staying irrational)

Anyhow, my point is that no stock grows at a linear, predictable rate YoY.
Planning to sell a % of shares every month/quarter looks good on a paper prepared by a financial advisor, loaded with assumptions, disclaimers, caveats, etc.
In reality, it cannot be executed by an income dependent investor over long periods of time (say a typical 25 year retirement, from 65 to 90).


----------



## andrewf (Mar 1, 2010)

Let's turn that around: no sensible retirement income portfolio would be 100% equities. When generating income, you would not sell x% of every holding in your portfolio, you would sell the most overweight holding to generate the income you're looking for. In a market correction, your bond allocation would be overweight, and that would be what you'd be selling.


----------



## Toronto.gal (Jan 8, 2010)

james4beach said:


> 1. The only 'magic' of dividends is that they happen automatically
> 2. For me, dividends are all about getting some of the cash now.


I never thought I would enter an ETF thread [I only say this because I don't own any of them], but after reading your & others' comments, I had to. 

*1.* Convenience is certainly not even 1/2 a reason I DRIP any investment, nor the only 'magic' I find in them.

*2.* As you said, for you, the cash is what matters at all times, and I gather regardless of age as you're not a retiree, yet prefer the cash to invest elsewhere, spend it, etc., but that's not the case for everyone, so would you say that all those who reinvest their dividends are missing your point?!

I reinvest most of my dividends of several large companies, and so I have experienced first hand the purchasing power that dividends have, and see its future implications, ie: that of increasing my portfolio every Q without the need for additional capital injection in certain cases, and at a market discount of 2%+ [depending on the stock]. 

If my dividends of x company, at say $1,000 a year as an example, buy me 66 shares a year, or 330 in 5 yrs, then, if I'm holding the investment for long-term & for eventual div. income, I don't really care what the price would be in 5 or more years, but no matter what happens [short of a blue chip stock going bankrupt], I'll have those additional 330 shares/purchased at a discount/increasing my portfolio every Q [even at reduced or cut dividends], so that's the bigger point for me, ie: accumulation, and given the punished share price of many companies these last few years, there could not have been a better time to reinvest the dividends, which can be turned off at any time btw, so it's not like it has to be on until one dies. Additionally, the dividends eventually would cover your initial investment.

Since you're a professional, you can easily & quickly figure out what any investment over the past 20 years for example, would be worth today had dividends been reinvested vs. having taken the cash instead. For the sake of peace, plz pick a company that had little chance of going bankrupt, like KO for example. Of course you could have made a fortune investing the dividends in a penny or other stock, but let's just stick to the realistic basics.

While I recognize some of the disadvantages of reinvesting the cash, I see more benefits for those that don't need the cash, and that is JMHO.

*Edit:* if you could post the results here for all to see, with maybe a couple of splits and a few div. increases, that would be great.


----------



## andrewf (Mar 1, 2010)

Tgal, that suffers survivorship bias. The only companies that you'd think of today are the ones that still exist. What about all the once-sterling blue chip companies that have disappeared since then?


----------



## Toronto.gal (Jan 8, 2010)

All the blue chip stocks I hold & DRIP today [CDN & American], that existed 20 years ago, are still here, and most likely will be here 20 years from now, Mr. Argumentative.

My point was simply that *reinvesting dividends have advantages as well.*

I acknowledge that the strategy has disadvantages, but I don't accept the view that one size fits all, that's all.

You're the mathematician here, so I thought you would show us some # results of your own.


----------



## doctrine (Sep 30, 2011)

> Tgal, that suffers survivorship bias. The only companies that you'd think of today are the ones that still exist. What about all the once-sterling blue chip companies that have disappeared since then?


How many companies disappear, and does their absence reduce your returns? An equal weight portfolio of the original S&P 500 in 1957 has outperformed and continues to outperform the yearly changes to the index. Because the winners outperformance more than accounts for the companies that go bankrupt.


----------



## andrewf (Mar 1, 2010)

Outperformance of EW is largely explained by the size and value effects, which are well documented.


----------



## My Own Advisor (Sep 24, 2012)

When BCE, KO and some other dividend studs start going bankrupt, then I'll go all-in ETFs. Until then, I invest in many companies directly.


----------



## GoldStone (Mar 6, 2011)

doctrine said:


> How many companies disappear, and does their absence reduce your returns? An equal weight portfolio of the original S&P 500 in 1957 has outperformed and continues to outperform the yearly changes to the index. *Because the winners outperformance more than accounts for the companies that go bankrupt.*


The bolded statement is true in the context of an index that owns 500 stocks. You can't apply it blindly to a personal portfolio that owns far fewer stocks.


----------



## GoldStone (Mar 6, 2011)

Fun stats:

S&P 500 was introduced in 1957.

The index returned 8,500% from 1957 to 1997 with dividends reinvested.

Of the 500 companies originally making up the index in 1957, only 74 remained on the list through 1997.

Only 12 of the 74 beat the index.


----------



## doctrine (Sep 30, 2011)

Jeremy Siegel does a lot of analysis of the S&P in his books and the survivorship effect. Few companies actually go to zero - they are usually bought by more successful firms, or taken private. For example, if you held 1 share in each of the original S&P 500, today you would have shares in about 350 firms, because of the spinoffs that were then later included in the S&P 500. There have been 900 companies added to the S&P 500 since 1957 and overall they have lowered returns on a buy-and-hold approach. It is fairly complicated with the number of merge, spinoff and private transactions of 500+ companies over 50 years.


----------



## Belguy (May 24, 2010)

This is a very interesting thread. I have been studying it hoping to determine whether a retired investor is better off including the broad-based ETF's such as XIU, VCE etc. in their registered account or go with the dividend ETF's such as a combination of CDZ and XDV or perhaps VCE+CDZ+XDV plus the top three REIT's in XRE.

I have read that dividend paying stocks are generally overpriced now as everyone is currently chasing yield.

Any thoughts or advice would be appreciated.

Also, which of these funds would you pick, either stand alone or in combination, for the U.S. equity portion of a retiree's registered portfolio?

https://personal.vanguard.com/us/funds/snapshot?FundId=0920&FundIntExt=INT

http://ca.ishares.com/product_info/fund/overview/CUD.htm

https://www.vanguardcanada.ca/individual/etfs/etfs-detail-overview.htm?portId=9563

https://www.vanguardcanada.ca/documents/literature/F9321EN.pdf

Previous research has shown that it doesn't matter all that much which individual ETF's you choose other than to pick those with the lowest fees.

If that is the case, I might just post them all on a dart board and choose the one where the dart lands.


----------



## My Own Advisor (Sep 24, 2012)

@Belguy,

"I have been studying it hoping to determine whether a retired investor is better off including the broad-based ETF's such as XIU, VCE etc. in their registered account or go with the dividend ETF's such as a combination of CDZ and XDV or perhaps VCE+CDZ+XDV plus the top three REIT's in XRE."

Personally, I like income/dividend income. It's tangible. Who knows what capital appreciation will be going forward. Cash is king. 

The reality is, many CDN blue-chip companies provide both yield and appreciation over time. As a retiree, I would think income over appreciation is more important but of course I could be wrong; not there yet, still in my 30s.


----------



## Belguy (May 24, 2010)

Apparently, there is either apathy or a lack of strong opinions when it comes to choosing between the broad-based ETF's such as ZCN, XIU, VCE etc. etc. and the dividend ETF's as listed in my previous reply. This surprises me a bit but maybe there is no definitive conclusion possible as folks do end up investing in both general types of ETF's and sometimes in a combination of both.

Any thoughts?


----------



## Squash500 (May 16, 2009)

Belguy said:


> Apparently, there is either apathy or a lack of strong opinions when it comes to choosing between the broad-based ETF's such as ZCN, XIU, VCE etc. etc. and the dividend ETF's as listed in my previous reply. This surprises me a bit but maybe there is no definitive conclusion possible as folks do end up investing in both general types of ETF's and sometimes in a combination of both.
> 
> Any thoughts?


 IMHO all these ETF's are pretty good. It just depends what your investment views are? For example...right now I'm very overweight in XRE, CPD and XDV...but that could change depending on future market conditions etc.


----------



## doctrine (Sep 30, 2011)

> Apparently, there is either apathy or a lack of strong opinions when it comes to choosing between the broad-based ETF's such as ZCN, XIU, VCE etc. etc. and the dividend ETF's as listed in my previous reply. This surprises me a bit but maybe there is no definitive conclusion possible as folks do end up investing in both general types of ETF's and sometimes in a combination of both.


My view on this is fairly consistent. I don't like the dividend ETFs. I don't like their methodology and their holdings. Honestly, if you're not into investing in individual companies, I would take ZCN with perhaps a touch of XRE and that's about it.


----------



## Squash500 (May 16, 2009)

doctrine said:


> My view on this is fairly consistent. I don't like the dividend ETFs. I don't like their methodology and their holdings. Honestly, if you're not into investing in individual companies, I would take ZCN with perhaps a touch of XRE and that's about it.


 I personally don't think that the ZCN is that great. It has a lot of holdings with very low percentage weightings. I much prefer the XDV. As usual....just my opinion. I much prefer investing in ETFS as I'm a terrible individual stock picker. I also like the fact that the XDV pays a monthly distribution as I use that income to help meet my monthly expenses.

Also ZCN has a lot of disasterous stocks such as Barrick and yamana gold as part of it's holdings.


----------



## doctrine (Sep 30, 2011)

No doubt. Which is why I don't hold ZCN. But, at least if you're buying now, you're getting those two and other miners/material stocks at a discount.


----------



## Squash500 (May 16, 2009)

doctrine said:


> No doubt. Which is why I don't hold ZCN. But, at least if you're buying now, you're getting those two and other miners/material stocks at a discount.


 Fair enough. However I have no interest in owning any mining or material stocks (even at a discount) as I'm in semi-retirement.


----------



## james4beach (Nov 15, 2012)

In my ongoing struggle to convince people that high-MER dividend ETFs are stupid and that generic index ETFs are the best prospects in the long term, I will point out:

*XIC and ZCN (both TSX Composite index) now have dividend yields of 3.5% ish, depending on how you count it.*

So if you love dividends, there they are: the plain old index has them. You don't need any exotic ETFs. Let me also point out that FXM, recommended a couple years ago in this thread, has under-performed the TSX in the last couple years. It's doing particularly badly as the market unravels. All of this reinforces my long-time argument on the forum that you really can't do better than the standard index ETFs. Dividend ETFs don't accomplish higher returns.

The best long term total returns, and the most efficient "retirement portfolio", is simply a stock/bond mix that relies on the plain old index ETFs. You can live off the dividends as well as selling off shares over time. Nothing exotic needed, it's dead simple.


----------



## james4beach (Nov 15, 2012)

This thread has posts from 2013. Back then, andrewf tried very hard to illustrate why dividends don't actually make a lick of difference. They don't increase your total return at all. It's a convenience of an automatic payout, yes, but you accomplish exactly the same thing by selling shares periodically.

He's right, but it's not easy to grasp this important concept. Because andrewf has since given up on making this argument, I encourage everyone to re-read this old thread. It's CMF gold!

Here's the practical implementation of andrewf's point: someone says they hold XDV, XRE, CPD because they need those cash distributions in retirement. But you can get the same (likely better) results by just holding XIU and selling off some shares every 6 months to _generate the cash you want_. Why is this second method better? You can adjust it to provide as much cash as you want. And you probably get stronger total returns, since you didn't chase exotic investments, and your retirement money lasts longer. The fees are also lower, which helps your money last longer.


----------



## My Own Advisor (Sep 24, 2012)

XIU is very dividend friendly and tax-efficient non-registered. A great choice for folks that like CDN dividends/distributions and wish to hug an index as well.


----------



## GoldStone (Mar 6, 2011)

james4beach said:


> So if you love dividends, there they are: the plain old index has them. You don't need any exotic ETFs. Let me also point out that FXM, recommended a couple years ago in this thread, has under-performed the TSX in the last couple years. It's doing particularly badly as the market unravels. All of this reinforces my long-time argument on the forum that you really can't do better than the standard index ETFs. Dividend ETFs don't accomplish higher returns.


1. FXM is not a dividend ETF. It's a value ETF. 
2. FXM did poorly in the last couple of years, but that has nothing to do with the dividends.
3. If you look at FXM since inception (Feb 2012) it is still well ahead of XIU. +11.6% vs +2%. 

Two years or four years, it's mostly noise. You need 20-30 years of returns to reach any meaningful conclusions about FXM.


----------



## jargey3000 (Jan 25, 2011)

re last few posts above.... I've been sniffing around the forum for a while now. One thing I've noticed ( and I'm sure others have too): HARDLY EVER is there a "consensus" among posters ... about ANY investment ....
sigh... I guess that's just the nature of the beast ....


----------



## AltaRed (Jun 8, 2009)

jargey3000 said:


> re last few posts above.... I've been sniffing around the forum for a while now. One thing I've noticed ( and I'm sure others have too): HARDLY EVER is there a "consensus" among posters ... about ANY investment ....
> sigh... I guess that's just the nature of the beast ....


As it should be. That is what makes a market.


----------

