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Looking for Yield?

As readers will have seen from the stock market forecasts for 2012, the range of possible outcomes are unusually wide. Some are extreme. It follows, therefore, that the Individual Investor ought to be broadly and globally diversified … with a tilt toward the defensive. With so much uncertainty surrounding ‘growth-oriented’ assets, risk-averse investors continue to emphasize ‘income-oriented’ assets. But the list is running short.

Interest rates are at or near all-time lows. Short Canada bonds yield barely 2%. Long Canada bonds yield 2.53%.

What about dividends? The Dow Jones Canadian Dividend ETF (XDV) yields barely 4%. (Dividends for Canadian investors at least are tax advantaged). (Dan Hallett had an excellent article in the Globe and Mail, “Distribution rate does not equal yield“).

Emerging Market Bonds (EMB) yield about 5% and have had 3 good years in a row (with massive fund inflows). Will they deliver a 4th year?

Should investors add to last years winners? See Morningstar “favourite Dividend ETF’s for 2012“.

Or should investors instead look to low(er) valuation opportunities?

To find yield, investors may have to look Overseas.

<img src="International Dividends.PNG" alt="International Dividends"/>

According to the index returns calculator, MSCI EAFE was down -16% over the 6 months to year-end and MSCI Emerging Markets was down -18%. Valuations (prices) have been beaten down. As a result, the Standard and Poor’s International Dividend Opportunities index now yields between 6% and 7%.

To evaluate this ‘Opportunity’, like any investment, investors could look at … Risk, Return, Tax and Cost.


It’s always about risk.

The S&P International Dividend Opportunities index construction methodology screens potential candidates by size (minimum $1B in market capitalization). Each stock must have three years of dividend growth and 3 years of earnings growth.

The ETF that mirrors the index is the SPDR S&P International Dividend E.T.F. (DWX). Dividend World eX-U.S.

It (the index and the ETF) measures the performance of the 100 highest dividend-yielding stocks in this ‘International’ (Ex-U.S.) Universe. And it looks reasonably diversified. The top 10 holdings are about 26%. Top 5 country weights are about 44%. 50% of industry holdings are Telecommunications Services and Utilities. The top 4 sectors are Telecommunications, Utilities, Financials and Consumer Discretionary (73% of holdings). Canadian content is about 4%. (LabradorIronOre, Pembina Pipeline, Transalta, Shaw, Just Energy Corp.). The Canadian names aren’t overly familiar. The non-Canadian names aren’t household names either. (Tele2 AB? Fred Olsen Energy?). (Investors find comfort in familiarity. Nice home-grown names like RIM, Nortel, Laidlaw, Loewen Group … comfortable disasters. That’s why we buy ETF’s … to avoid individual stock blow-ups). Anyway …

Valuations Overseas have been beaten down. (See above). Lower prices mean higher yields. Still 6% to 7%?

It must have something to do with risk.

There is always the risk of dividend cuts. And there is always the risk of a broad market correction. Dividends, however, help to buffer an investment somewhat in a downdraft.

Low price and high yield can mean that there is the risk of a ‘value trap’ … where the price is beaten down but for good reason. Often that reason is a reflection of limited future prospects. Investors ought to be aware of this before diving in. (High yield, low price-to-earnings, low price-to-book-value among other value ratios do not mean a stock is a ‘value’ stock. An analyst must also assess if there has been a fundamental shift in the company’s business or environment to determine if the troubles are temporary or permanent). Can all 100 stocks in DWX be ‘value traps’? Again, this is why investors are attracted to ETF’s … instead of individual stocks.


Yield is 6% to 7% but what about protection of capital? See also Risk above.

According to S&P, the International Dividend Opportunities index is down about -10% (Total Return to year-end December 31, 2011). The ETF (DWX) is down about the same (-11%).

Can a risk-averse investor ignore a potential market downdrafts while they collect their dividends?


Non-Tax-sheltered (Non-RSP, non-TFSA, etc.) investors will recognize that International dividends don’t qualify for the Canadian Dividend Tax credit so there is no preferential tax treatment on dividend income from DWX.


MER of the DWX ETF is 0.45%.


DWX appears to be a diversified, high yield bet. But, like all investments, it is not without risk.


I do not own DWX but it is on my buy list.


Next time? More Risk Management.
Doug Cronk CFA is Manager, Investments for a Canadian Pension Plan
6 Comments Post a comment
  1. JTN #

    There’s no preferential tax treatment but putting this in a RRSP would at least eliminate the US withholding tax right?

    I like the new look of the site!


    February 1, 2012
    • Thanks for the comments re the new site look. (A bit cleaner, tidier …).

      Regarding taxation of US dividends, it looks like using an RRSP solves the US dividend taxation problem (see highlighted quote below).

      But First, I shouldn’t be answering taxation questions without my tax attorney or John Heinzl present. 🙂

      Second, when I suggested a look at DWX, ‘Looking for Yield’?
      note that DMX is not US dividends .. it’s ‘International’ dividends …
      I’m not aware that Canada has a tax treaty for ‘sheltered’ dividends beyond the U.S.

      Third, if we can’t have John Heinzl present, then we can quote him: (see below)

      (Also a good read: Jamie Golombeck: )

      Here’s the quote:
      John Heinzl – The Globe and Mail 15/11/2011 “Look before you leap into U.S. dividend stocks”

      “A taxing dilemma
      U.S. stocks don’t qualify for the dividend tax credit, so if you hold them in a non-registered account, the taxman will take his full pound of flesh. Specifically, you’ll pay a 15-per-cent U.S. withholding tax on the dividend, and you’ll face Canadian tax on the full amount as well. You can usually use the initial 15-per-cent haircut as a foreign tax credit on your return, so the net result is that your U.S. dividends will be taxed at the same rate as interest.

      Using a tax-free savings account or registered education savings plan doesn’t solve the problem entirely, because you’ll still face the 15-per-cent withholding tax, which is not recoverable in these cases. (Under the Canada-U.S. tax treaty, the 15-per-cent rate is reduced from the statutory non-treaty rate of 30 per cent; your broker should fill out a W-8BEN form so you don’t get dinged at the higher rate.) There’s a better option, however. Under the treaty, if you hold your U.S. stocks in an account that provides pension or retirement income – a registered retirement savings plan, registered retirement income fund or locked-in retirement account, for example – you won’t pay tax on your U.S. dividends. That’s why many Canadians prefer to keep their U.S. dividend stocks in an RRSP or RRIF.”


      February 2, 2012
      • JTN #

        Mr. Cronk, I was just reading your post on REIT valuations when I remembered that though I read your response to my comment I never did say thanks. I’m still mulling over whether to decrease my fixed income exposure in favour of such ETFs as DWX. It’s a tough call.


        February 15, 2012
      • I’m hesitating on DWX myself. If the market takes a dump, bonds will benefit … that might be a better time. (Oh, yeah, market timing doesn’t work). I’m firmly on the fence on this one too but oh the temptation.


        February 16, 2012
  2. Gabe #

    Very interesting. Thanks for the post..


    January 24, 2012

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