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Index ETFs vs Dividends ETFs

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  • Mar 20th, 2013 11:02 am
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Member
Mar 4, 2007
430 posts
77 upvotes
Calgary

Index ETFs vs Dividends ETFs

Hi All,

So here is a question I have asked in the past before but figured I should create a post to get more peoples thoughts and opinions. I've been doing quite a bit of reading the past month and honestly it is a bit overwhelming with the information that is out there so I figured it might be good to ask here and also for some newbie readers and investors, like myself, to get another perspective from RFD peeps.

Please feel free to add pros and cons of each, why you prefer one over the other and what best situation to use each, if there is such a thing. I'm not necessarily asking for individual stocks but just a general outline of each.

Cheers
4 replies
Deal Addict
User avatar
Dec 26, 2010
1736 posts
776 upvotes
Calgary
I know I chipped in on the other thread, but I want to point out that dividends are just a distribution structure. They're not better returns. They're not advantageous on the side of returns. They're just a tool for people that would like to see money come out and arrive in their bank account every quarter. If you're just reinvesting the dividend, than what is the point?

A broad vanilla index has small caps, mid caps and large caps. It'll pay a dividend like say 2%.

A dividend ETF goes after dividend companies, mainly large cap as they've lost their growth perspective and need to pay a dividend to attract investors. It might pay a dividend of 3 or 3.5%

There is a tax advantage for receiving dividends (though not for the corporation giving them). But within a TFSA and RRSP this is a moot point. And in an unregistered account, while having a reasonable regular job income, won't produce you much of tax advantage compared to a capital gains.

The fact is that when you buy a dividend fund you miss out on the small caps and mid caps that have a bigger growth perspective.

I'm still sitting in the camp that people just like to look at the useless percentages they can come up with. Yield on original investment is a big one I see. Another one, which is pretty much guaranteed to come up in this thread (and every dividend thread) if there is interest: "RBC is paying a 4% dividend and saving accounts are paying no more than 2%, the investment choice is easy. " Or "RBC is paying a 4% dividend while the market is going down." If you're told these things... run.
Member
Nov 27, 2009
319 posts
25 upvotes
It depends on a number of things. I am also a newbie investor and here is my conclusion from a bunch of reading.
For registered accounts, dividend stocks/funds are not best option out there in terms of growth. Also bear in mind that for your money to grow, you would need to invest enough so that when you drip your number of shares actually go up otherwise you just get a little bit of cash just sitting there in your account doing nothing. For me, I find this is a barrier to entry with most blue chip stocks/funds with 2-3% dividend yield. You cant just invest 2-3k. So now i am mostly aiming to get capital gains rather than dividends with individual stocks and any leftovers go to index funds.
However investing outside of registered accounts and if you do not need the money in the short term, dividend investing could be the way to go.
Banned
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Feb 15, 2008
26318 posts
3242 upvotes
Calgary
In the Canadian context, "dividend ETFs" tend to not include much in the way of gold or mining shares generally. While the broad index ETF, the TSX60 ETF XIU, includes 10-15% gold/mining shares.

Obviously with the recent pummelling of the gold stocks, largely for little or no good reason, the dividend-focussed ETFs have outperformed. However, there is an amazing amount of earnings (and hence, dividend-paying) power embedded into the mining stocks at the moment so this outperformance most certainly is not guaranteed.

XIU now has a dividend yield of close to 3.6% when you calculate the yield based on the most recent distribution of 16.46 cents/share. Which is similar to most dividend ETFs, with lower management fees to boot.
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