Gordon Pape: Three ETFs I Like Now

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Interest rates are coming down in most parts of the world. Few people would have expected this last fall when central banks seemed determined to push them to what they considered more “normal” levels after a decade of rock-bottom rates following the Great Recession. But Donald Trump’s trade wars and a December stock market plunge changed things. Almost overnight, the central banks turned dovish and real-world interest rates started to come down.

All this is great news for interest-sensitive securities, like utilities and many dividend-paying equities. The ETFs that invest in these stocks have seen a dramatic turnaround in their fortunes. Here are three I like right now. All are recommendations of my Income Investor newsletter. Prices are as of July 30.

BMO Equal Weight Utilities Index ETF (TSX: ZUT)

Originally recommended: Jan. 28/16 at $14.12
Current price: $18.64
Annual payout: $0.777 (trailing 12 months)
Yield: 4.2 per cent
Risk: Moderate
Website: www.etfs.bmo.com

Comments: Utility stocks surged after the Federal Reserve Board and the Bank of Canada turned dovish on interest rates. These stocks are highly interest-sensitive, so a falling rate environment will boost share prices significantly.

We’ve seen that in the performance of this ETF. The price hit a 52-week low of $14.90 last Christmas Eve. Shortly after that we began hearing reports that the Fed was rethinking its interest rate approach. The units rallied almost immediately and have been heading higher ever since. The price is up 25 per cent since the December low. The monthly distributions have also increased and recently have been running at $0.067 per unit.

Utility stocks are ideal for income portfolios. They offer steady cash flow, increasing dividends, and stability. There are many good individual stocks available but if you only want to own one security in the sector, this is one to look at.

BMO U.S. Dividend ETF (TSX: ZDY.U)

Originally recommended: Dec. 4/14 at US$19.04
Current price: US$25.46
Annual payout: US$0.74 (trailing 12 months)
Yield: 2.9 per cent
Risk: Moderate
Website: www.etfs.bmo.com

Comments: This ETF has been designed to provide exposure to a yield weighted portfolio of U.S. dividend-paying stocks. It utilizes a rules-based methodology that considers the three-year dividend growth rate, yield, and payout ratio to choose securities. Although the fund trades on the Toronto Stock Exchange, it is priced in U.S. dollars.

This has been a good performer. Over the five years to the end of June, it posted an average annualized return of 9.4 per cent.

The portfolio has 102 positions, all more or less equally weighted. Top holdings include AT&T, IBM, Philip Morris, Wells Fargo, and AbbVie.

Monthly distributions this year have been at the rate of US$0.063 per unit. If maintained, that would total US$0.756 over a full year. The MER is 0.33 per cent.


Originally recommended: Dec. 4/14 at US$81.07
Current price: US$102.83
Annual payout: US$2.421 (trailing 12 months)
Yield: 2.4 per cent
Risk: Moderate
Website: https://us.spdrs.com

Comments: This ETF from State Street Global Advisors tracks the S&P High Yield Aristocrats Dividend Index

The portfolio is made up of companies that have increased their dividends annually for at least the past 20 years. They include AT&T, IBM, AbbVie, People’s Financial, and Old Republic International.

The portfolio is very well balanced by sector, led by industrials (16.8 per cent), financials (16.4 per cent), consumer staples (15.4 per cent), utilities (10.4 per cent), and materials (9.1 per cent). Distributions are paid quarterly and will vary, with the largest payout coming in December. The expense ratio is a reasonable 0.35 per cent.

All these funds are fully exposed to the stock market, so they would be vulnerable if we have a sharp correction. However, historically, dividend stocks tend to hold up better in a declining market, which would tend to cushion the extent of any losses.

Talk to a financial advisor before making any decisions.

Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca/subscribe.

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