In Part II of the series, we explain what the Global Dividend Aristocrats portfolio is and how it earned 8.48% per year over the past five years.
In Part I we covered how Dividend Aristocrats out-perform the market and several reasons why higher dividend yielding companies are more generally able to produce better returns.
The purpose of this article is to take you through the model portfolio and to introduce you to the official Frugal Investors Global Dividend Aristocrats portfolio for Canadian investors. After thirty-five hours of research I have crafted a bespoke and well-balanced income portfolio that is prepared to weather whatever economic storms get thrown its way. Given that a third of your investment return comes from dividends and income alone, it makes sense to focus here.
Today we are going to cover:
- What the research says about buying shares direct versus using an ETF
- Introduction to the Global Dividend Aristocrats Portfolio
- Variations to the portfolio depending on your risk tolerance
- Historical returns
What the Research Says – To buy or not to buy shares direct…
Where you live in the world – believe it or not – dictates how you should invest your money. I think I truly began to understand this in Year 8 of my journey and as a direct result of owning assets in different regions, in local currencies. If you live in the U.K. / Britain then please read here.
Canada is a great place to follow the Global Dividend Aristocrats strategy and it is home to some excellent companies, who are returning cash to shareholders and maintaining excellent balance sheets.
If the majority of your assets are in Canadian dollars right now ($), then you need to be careful about taking on too much overseas exposure by buying foreign shares directly. There are currency costs through your broker for each transaction, foreign withholding taxes on income (typically net 15%), and over long periods of time currencies like the US dollar look primed to move lower against the Loonie.
In addition, the cost of self-managing a portfolio (in time, and trading costs) is excessive especially if you have a part-time or full-time career. The risk is that you under-perform the market. In Canada, with the S&P/TSX Composite Index yielding you 3.31% and producing an 7.54% annual return over 10 years, it’s hard to argue that spending huge amounts of your time individually investing is going to gain you significantly higher returns. Although we do plan to show how self-selecting Canadian dividend aristocrats can make money over time, it is hard work to manage stocks individually, which is why 92-95% of active traders under-perform the market over 15-year periods.
Global Dividend Aristocrats portfolio
The original intention, at the outset, was to build a portfolio of individually owned stocks and shares that you could own directly. It is possible to do this in Canada and we intend to run a ‘Part III’ where we explore this in detail. That being said, it’s hard work, and not recommended for the average investor without serious time investment. In addition Europe, the United States, the U.K., Japan and Australia are enticing markets for dividends and have hundreds (if not thousands) of established players.
The results of the Frugalist Investor’s detailed analysis suggest that getting exposure to global dividend aristocrat ETF’s is the simplest, easiest and lowest cost way to invest in this section of the market. The portfolio presented below gets you access to a large cross section of those businesses at a reasonable cost.
|Name of ETF||Tickers||%Portfolio|
|Invesco Canadian Dividend ETF||PDC||10.00%|
|WisdomTree Canada Quality Dividend Growth||DGRC||10.00%|
|SPDR US Dividend Aristocrats ETF||SDY||10.00%|
|Schwab US Dividend Equity ETF||SCHD||10.00%|
|Vanguard Dev. All Cap ex North America Index||VIU||50.00%|
|Vanguard FTSE Emerging Markets Index||VEE||10.00%|
|Vanguard Canadian Aggregate Bond Index||VAB||0.00%|
Choosing a Risk Profile
There are two fundamental decisions that you need to make as an investor.
The first is to decide what to invest in. Generally speaking it is better to use a passive approach to investing, because it allows you to make decisions about the ‘type’ of investments you want and the sectors and asset classes you favour; however they have the major benefit of doing most of the buying/selling and asset allocation for you. At Frugal Investors we’ve presented several time-tested strategies, including this portfolio.
The second key decision is how much exposure to the stock market you are comfortable with taking. This is not a decision to make lightly: how much volatility you experience depends on the amount of money you allocate to equities (stocks and shares) as opposed to fixed income (bonds).
Beyond that, though, the Frugalist Investor has created a cheat sheet that enables you to adjust the Global Dividend Aristocrats portfolio for 40%, 60%, 80% and 100% equity exposures. So once you know what risk tolerance you are comfortable with, choose a portfolio below:
For the 80% equity allocation (second to right column) you would need 20% weighting to the Vanguard Canadian Agg Bond fund to achieve a 20% real weighting in bonds overall. For more exposure to Canada and US, simply increase the weighting to these geographies and decrease VIU.
The Global Dividend Aristocrats portfolio (100% equity) has the following sector and country diversification features:
It is comfortably weighted towards Canada and the United States, which are home to some of the world’s best dividend aristocrats. The great advantage here is that this closely tracks the S&P Global Dividend Aristocrats index.
The average dividend yield is 2.6%, representing the fact that there are a number of very high-quality and income rich businesses producing stable and regular returns for shareholders.
In terms of holdings and key information here is a snapshot of several ETF’s that form part of the portfolio and a breakdown of their underlying holdings:
|Vanguard FTSE Developed ex Nrth Amer ETF||VIU||50.00%|
The VIU etf has returned 7.35% over the past five years and holds many well-recognized European conglomerates with steady and consistent dividend paying records. Nestle, Roche, Novartis, Toyota, SAP, LVMH and Sanofi are all recognized dividend stalwarts and supply many of the products we use every day. The ETF has great sector diversification, a solid dividend yield, low PE’s and 3692 holdings.
|Invesco Canadian Dividend ETF||PDC||10.00%|
The PDC ETF has returned 9.01% since inception and it holds many of the Canadian dividend aristocrats, which have a track record of increasing dividends for at least 7 consecutive years. Although this is a space dominated by banks and oil companies, PDC does a good job of covering the blue chip companies with the best record of regularly increasing dividends. With a dividend yield of 4.33% pretty much the only downside is the higher 0.55% MER. The WisdomTree fund is its growth-driven cousin.
The US ETF’s are fantastic. Take a look at either of them through Morningstar and you will find a balanced portfolio of businesses that have raised their dividend for 25 consecutive years.
In order to invest in anything – be it individual shares, portfolios of ETFs (that hold shares), bonds, income funds or REITs – you need to understand what is happening underneath. Hopefully the summary above has educated you on what the Global Dividend Aristocrats portfolio is composed of. We will do further deep dives on the holdings in Part III.
What you really need to know, though, is the underlying performance. How has this total portfolio performed over 1-, 3- and 5-year periods?
|Name of ETF||1 YR||3 YR||5 YR|
|Invesco Canadian Dividend ETF||19.91||7.34||7.86|
|WisdomTree Canada Quality Dividend Growth||18.48||8.45||7.12|
|SPDR US Dividend Aristocrats ETF||22.84||11.18||10.16|
|Schwab US Dividend Equity ETF||26.03||14.1||11.52|
|Vanguard Dev. All Cap ex North America Index||15.82||9.05||7.35|
|Vanguard FTSE Emerging Markets Index||15.09||9.83||6.88|
|Global Dividend Aristocrats Return (Portfolio)||19.7||10.00||8.48|
|S&P Global Dividend Aristocrats Index (Benchmark)||21.44||10.11||7.16|
|S&P/TSX Composite Index (CAD Benchmark)||22.88||6.89||6.28|
The Global Dividend Aristocrats portfolio has beaten the S&P/TSX Composite Index over 3-years and 5-years by 3.11% and 2.2% respectively. In addition it has beaten S&P Global Dividend Aristocrats benchmark over 5 years.
Having a geographically and sector-diversified portfolio of global dividend yielding companies makes sense. As we saw in Part I, high yielding businesses tend to significantly out perform their non-dividend yielding peers over periods of 10-15 years and longer.
The Global Dividend Aristocrats portfolio has produced an annual return of 8.48% each year for the past 5 years, which is 2.2% higher than the annual return on the S&P/TSX Composite index as a benchmark.
The constituent ETF’s hold fundamentally high-quality businesses, at a relatively low cost, which are diversified and help you to gain exposure to global dividend shares without spending excessive amounts of money trying to buy foreign shares directly.
From one Frugal Investor to another, the portfolio is well worth considering when it comes to your own investing approach!