However, the situation raises several questions since it is not a very long track record and is only for one dividend fund (see other Canadian dividend ETFs reviewed here and find a list of US-traded dividend ETFs in IndexUniverse's ETF Finder here). How stable and sustainable are the cash payouts likely to be? Does a dividend strategy sacrifice capital growth to achieve the cash payout, in other words how do dividend fund total returns compare to overall equity returns in the long run?
Cash payouts likely to be quite stable and growing - Dividends are "sticky"
Once a company has started paying dividends, management is loath to cut them except under dire circumstances. Thornburg Investment Management's Cultivating the Growth of the Dividend examines the long term history of dividend payments, both their stability and growth, in the USA. As the document discusses, management is very reluctant to cut a dividend as that conveys to investors that there are serious problems. On the other hand, paying a dividend limits the amount of profits sitting in the bank that managers might be tempted to use for wasteful pet projects or poor acquisitions and unprofitable empire building. Managers are forced to pick only the best projects that will add value. It is no accident that all sixty of the most successful and largest companies in Canada, as held within XIU, pay a dividend. About a sixth of companies in the TSX Composite do not pay any dividend as of July 2013 according to Norm Rothery writing in the Globe and Mail.
Dividends have always, and in countries around the world, many even more so than Canada and the USA, made up a significant portion of stock market returns. A chart from S&P Dow Jones in The Role of Dividends in Income Portfolios shows the significant contribution of dividends - anywhere from 25 to 40% - to the TSX Composite's total returns, decade by decade since the 1960s, with most of the variation being due to the variation in capital gains not the dividends!
Dividend paying companies produce higher total returns than non-payers
Yes, it is like having your cake (capital gains aka price return) and eating it too (dividends). Here is a chart from Mackenzie Investments showing results since 1989 amongst TSX stocks.
The High Dividend Yield Return Advantage.
This latter graph, looked at carefully, introduces a layer of subtlety about dividends, namely which sub-segment of dividend payers does best - is it high dividend yielders, or low payout companies (dividends as a percent of profits), cash-flow (e.g. PH&N's Dividends: the Road Less Shaken) or some combination that gives the best results? Research result vary between countries, where different dividend cultures prevail. In the USA for example, there was a gradual shift away from companies giving back cash to shareholders through dividends. Instead, the companies did stock buybacks. Now the trend may be reversing. A recent market commentary by Scotia McLeod noted that 406 of the 500 companies in the S&P 500 now pay a dividend, the highest level since 1998. Reading through the excellent summary of the research in the Tweedy, Browne paper, it appears that a combination of high-yield and low-payout works best ... on average and in the longer term (a decade or more).But since the research on which exact dividend strategy works best differs, it is therefore no surprise to see dividend ETFs based on alternative selection and weighting criteria.
Dividend stocks and ETFs perform better in terms of return vs volatility
One attractive result, revealed quite consistently across many studies, is that dividends stocks have a higher Sharpe ratio, which measures the amount of return per unit of risk (standard deviation of stock price changes). Here is a typical chart for the TSX from Franklin Templeton. Similar charts can be found for the S&P 500 or other countries (e.g. Thornburg's Investing in Retirement Using a Global Dividend Strategy).
The outperformance of dividend strategies occurs more reliably over longer periods. There have been periods of several years when the market average does better than dividend stocks or funds. e.g. The above-linked S&P Indices document has a chart showing the TSX Composite outperforming the indices of both XDV's and CDZ's during 2006 to 2008 and the XDV index has been lagging the TSX for most of the time since 2005 to 2012.
What may be true of dividend stocks as a whole may not apply to every individual stock. Some no-dividend growth companies will do extremely well while some once-solid dividend companies decline and fall.
Bottom Line: Dividend stocks and funds offer good promise for solid, dependable, growing cash income as well as capital growth for long term investors.
Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.