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New dividend index fund has rock-bottom management fee

by Wayne Cheveldayoff, 2005-12-08

The new iUnits Dividend Index Fund being offered by Barclays Canada is likely to attract significant interest from investors for two reasons. First, the federal government recently cut the effective tax rate on dividends. Second, the new fund comes with an annual management fee that is less than a third of what traditional dividend mutual funds charge.

The fund, which will be launched this month, is a new addition to the group of exchange-traded funds (ETFs) run by Barclays Global Investors Canada (see

The ETFs trade on the Toronto Stock Exchange and are designed to mimic the performance of various stock indexes.

In this case, the iUnits Dividend Index Fund (expected TSX symbol XDV) will track the performance of the newly introduced Dow Jones Canada Select Dividend Index, comprising 30 larger and more actively traded dividend-paying Canadian companies.

It will be the first ETF in Canada consisting only of dividend-paying stocks.

Dividend-paying stocks got a boost recently when the federal Finance Minister announced an effective lowering of the top tax rates for dividends paid on common shares to approximately 21 per cent from 32 per cent. In contrast, the top marginal tax rate for capital gains is about 23 per cent, and for regular income 46 per cent, although the exact rate depends on the province.

Investors sometimes buy dividend-paying stocks directly, essentially doing their own stock picking. But those wanting the risk-moderating diversification offered by a fund have had access until now only to traditional, actively managed dividend mutual funds.

Examples of such traditional mutual funds in this sector include the BMO Dividend Fund, with an annual management expense ratio (MER) of 1.75 per cent, TD Dividend Growth Fund (MER 2.15 per cent) and Investors Dividend Fund (MER 2.78 per cent).

With average dividend yields just over 3 per cent, the MERs on traditional funds eat up a good chunk of the expected cash yield.

As with all ETFs, however, the Barclays iUnits Dividend Index Fund has a very low MER – 0.5 per cent – less than a third of the MER charged by a typical mutual fund (and less than a fifth of the MER on the Investors Dividend Fund).

The Barclay’s fund is very similar in structure to its U.S. counterpart, the iShares Dow Jones Select Dividend Index Fund (symbol DVY), which carries a 0.4 per cent MER and has become quite popular, with assets now topping $7 billion (U.S.). The current yield being distributed by this fund is 2.79 per cent.

Investors have obviously been impressed with the fact that dividends add significantly to long-run returns, especially if reinvested.

Dow Jones says that from 1929 to 2002, the Dow Jones Industrial Average produced an average return of about 11.31 per cent a year. Of that, 6.9 per cent came from capital appreciation and 4.3 per cent from dividends.

In choosing dividend-paying stocks for its Canadian index, Dow Jones says it focuses on the larger, more-liquid stocks with higher dividend yields and proven dividend growth and dividend sustainability.

It caps individual securities at 10 per cent of the total assets in the fund and it immediately drops any that significantly reduce or stop paying dividends.

The average indicated dividend yield for this group of stocks is 3.3 per cent and the annualized total return over the past five years is 16.1 per cent, according to Dow Jones.

Among the stocks in the index (with recent percentage annual dividend yields in brackets) are: Fortis (2.66), Royal Bank (3.02), Canadian Utilities (2.78), CIBC (3.75), Manitoba Telecom (5.37), National Bank (2.92), Atco (1.80), BMO (3.39), TD (2.93), IGM Financial (3.23), TransCanada (3.44), BNS (3.13), Magna (1.74), BCE (4.14), TransAlta (4.34), Dofasco (3.02), Enbridge (2.68), Aliant (4.12), Rothmans (5.55), Terasen (2.53), Telus (1.65), Sun Life (2.34), Emera (4.54), Power Financial (2.58), Russel Metals (5.34), Great-West Lifeco (2.89), Torstar (3.18), CI Fund Management (3.33), AGF (3.06) and Hudson’s Bay (2.63).

Wayne Cheveldayoff is a former investment advisor and professional financial planner. He is currently specializing in financial communications and investor relations at Wertheim + Co. in Toronto. His columns are archived at and he can be contacted at

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©2005 Wayne Cheveldayoff