Research Department


For or against high-dividend equity funds?

This blog post is adapted from my French column with the newspaper Les Affaires.


For or against high-dividend equity funds? Oh, come on, no one can be against dividends! But wait, the darling of so many fund holders and other investors does not provide only upside. Let's take a look…


Dividends are reassuring. Investors who do not have complete confidence in the stock markets may say to themselves: "If I don't generate gains with my portfolio for a while, with dividends, at least I'll be paid for waiting." They think that a high dividend-distribution rate confirms that the company is making profits and shows a level of confidence in the future. In addition, companies listed on the stock market are often very reluctant to cut their dividends. So, regular dividend distributions represent a commitment that can be reassuring.

High dividends promote discipline. Perhaps because dividends boost confidence, investors tend to hold their high-dividend equities longer than other securities. In addition, studies show that high-dividend equity funds enjoy the highest survival rate of all fund categories. Investors are extremely loyal to this type of fund. They are more patient and persevering in their investment strategy.

Dividends of Canadian public corporations benefit from a tax credit. Consequently, their tax rate is lower than for interest income. But which of Canadian dividends and capital gains are the least heavily taxed? It depends. For the range of taxable income below $45,000, the marginal tax rate for an individual taxpayer in Québec is distinctly lower for dividends than for capital gains. From $45,000 to $85,000, it is nearly equal, and above $85,000, capital gains are taxed at the lowest rate. And the more your income exceeds this threshold, the bigger the difference, as shown in the table below. Keep in mind that dollars that you pay in taxes cannot be used to pay for groceries!

Marginal tax rate for 2016

Taxable income Tax rate for Canadian company dividends Tax rate for capital gains
$15,000 - $42,000 5.6% 14.3%
$42,000 - $45,000 11.2% 16.3%
$45,000 - $85,000 17.5% 18.6%
$85,000 - $90,000 23.0% 20.6%
$90,000 - $103,000 29.4% 22.9%
$103,000 - $140,000 31.8% 23.7%
$140,000 - $200,000 35.2% 25.0%
$200,000 and over 39.8% 26.7%/td>

Source: Raymond Chabot Grant Thornton – Tax Planning Guide
Figures are rounded for simplicity.


Loss of diversification. Believe it or not, most equities listed on the stock market pay only minimal or no dividends. And the fact that a stock pays a very high dividend is no guarantee of quality. A large number of companies that don't pay dividends are very profitable. And, conversely, often companies in trouble persist in paying fantastic dividends. By insisting on high-dividend securities, you substantially limit your potential for diversification and, consequently, risk control.

A dividend is not a gift. Generally, when the eligibility date for a dividend payment expires, the share price falls by almost an equivalent amount. Let's say, for example, that a share trading at $10 is about to pay a dividend of 25 cents; the price will fall to $9.75 the day after the distribution. Each dividend paid reduces the share price by as much, and in the long term lowers its potential for capital gains. If you are invested for the long term, notwithstanding taxes, you should be indifferent to the payment of dividends. Whether the money is distributed to you or reinvested in the company, it belongs to you anyway. Only the way in which you own it is different.

Taxation of dividends from foreign companies is very disadvantageous. Foreign dividends are taxed at the full rate for ordinary income, or the same rate that is applied to interest income. In addition, foreign governments apply withholding tax to dividends paid to residents of other countries, like Canadians for example. This withholding is typically around 15%. And even RRSPs and RRIFs are affected by these withholdings, which are nonetheless recoverable. But, ultimately, income from foreign dividends is much more heavily taxed than income from Canadian dividends and capital gains.


It would be misleading to believe that high-dividend equities are superior in all circumstances. Dividends can offer you a certain level of reassurance and encourage you to persevere with your portfolio strategy. But, companies that pay high dividends are not inherently superior to others. From a tax standpoint, dividends from Canadian companies may prove to be very advantageous or, on the contrary, very disadvantageous compared to capital gains, depending on your income level. Foreign-source dividends are heavily taxed. In addition, a strategy centered on high dividends greatly limits the ability to diversify your portfolio.

Text box: Action plan

High-dividend mutual funds or equity ETFs may prove to be advantageous when:

  • You tend to give up on your investment strategy during periods of turbulence and the presence of high dividends helps you stay on course.
  • You have significant non-registered investments and you report personal income of less than $45,000.

High-dividend mutual funds or equity ETFs should be avoided when:

  • You are indifferent to the "charm" of dividends and instead want to maximize your portfolio's diversification and after-tax returns.
  • You have significant non-registered investments and you report personal income of more than $85,000.
By: Raymond Kerzérho | 0 comments

An ETF portfolio resistant to real estate market crashes and other calamities

This blog post is adapted from my French column with the newspaper Les Affaires.

How about an RRSP portfolio that seldom loses money and has chalked up an annualized return of over 8% since 1988 and 5.7% over the past 10 years (2007-2016)? The portfolio is in no way built on byzantine strategies and only needs to be adjusted (rebalanced) once a year. On top of all that, it isn’t even designed to maximize returns. Instead, it’s aimed at capturing market returns while remaining as diversified as possible, so as to eliminate the risks of focusing on a specific holding, country or sector. Too good to be true? It’s possible with index exchange traded funds (ETFs).

Building blocks

Our portfolio necessarily includes equities and bonds — the former to achieve return, the latter to control volatility. We’ll opt for the most common distribution: 60% in equities and 40% in bonds. Let’s take care of bonds right off: we’ll give the nod to an ETF that mirrors the overall Canadian bond market. We’ve picked the BMO product, but other providers offer ETFs that are just as valid.

As for equities, we’ll invest equal thirds in Canadian, U.S. and international stocks. About three-quarters of international equities market capitalization is concentrated in developed economies (Great Britain, Japan, France, Australia, etc.), with the remaining quarter in emerging economies (China, South Korea, Russia, etc.). We’ll keep the same proportions.


For the most part, we’ve chosen ETFs that are simple and diversified (a large number of holdings), with low expenses (total of 0.15%). On top of this, each ETF has to faithfully replicate its benchmark index return. We’ve also limited ourselves to ETFs traded in Canadian dollars, to avoid currency conversion fees. Here is the resulting portfolio:

Holding Ticker Mgmt. expense ratio Weight Number of holdings Benchmark index
BMO Aggregate Bond Index
ZAG 0.14% 40% 800 FTSE TMX Canada Universe Bond
TOTAL BONDS     40%    
Canadian equities
iShares Core S&P/TSX Capped Composite
XIC 0.06% 20% 250 S&P/TSX Capped Composite
U.S. equities
Vanguard U.S. Total Market Index
VUN 0.16% 20% 3,600 CRSP U.S. Total Market
International equities
iShares Core MSCI EAFE IMI
XEF 0.22% 15% 2,487 MSCI EAEO Investable Market
FINB BMO MSCI Emerging Markets ZEM 0.29% 5% 491 MSCI Emerging Markets
TOTAL EQUITIES     60%    
TOTAL PORTFOLIO   0.15% 100% 7,628  


Sources: iShares, BMO and Vanguard
Note: These ETFs are appropriate in an RRSP context. For any other situation, speak to your financial advisor.

Portfolio risk

What makes this appealing is that, as you can see, it’s possible to build a simple, easily maintained portfolio that does what it is supposed to do, without inflicting too many major ups and downs on its owner. Our diversified portfolio includes over 7,600 holdings, and covers 45 countries and all sectors. The following chart shows the annual returns of a simulated portfolio made up of the indices closest to the ETFs in our model portfolio, with returns reduced by 0.50% to allow for management fees, transaction costs and any other expenses.

Source: Morningstar Direct
Note: The above returns have been simulated based on the following indices: 40% FTSE TMX Canada Universe Bond, 20% S&P/TSX Capped Composite, 20% Russell 3000 in CAD$, 15% MSCI EAFE in CAD$, 5% MSCI Emerging Markets in CAD$. All of the returns have been reduced by 0.50% per year to allow for expenses. The portfolio is rebalanced according to the target weights as at December 31 each year.


The most remarkable thing about this simulated portfolio is that it has lost money only four times in 29 years, and only once in seven years, in 1990, 2001, 2002 and 2008. The worst return was  15 %, during the 2008 financial crisis. You may object that 1988 to 2016 was a very positive period, and that returns may well be lower in the future, and I think you’re probably right. Indeed, returns have been more modest since 2000.


In the future, a globally diversified ETF portfolio may make money less often than six years out of seven. It is still plausible, however, that it will continue to be profitable most of the time. And we haven’t even tried to build a portfolio that minimizes losses or maximizes returns, focusing instead on participating in equity and bond markets while controlling risks and expenses. Surprising, don’t you think?

By: Raymond Kerzérho | 0 comments