Dividend growth trends in Dividend ETF’s?

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Hi there,

I was looking at the millennium conservative portfolio and noticed the dividend ETF XHD.
This prompted me to ask a question that has been on my mind for some time now.

Something that I feel I have never got a good understanding about is why the dividend in a lot of ETF’s do not seem to keep growing in value over time like an individual dividend stock would?
Most of the ETF’s I look at seem to stay relatively flat for dividend growth.

But to make things more confusing, if you look at Vanguard VYM dividend ETF on the US exchange, it does look like it has an increasing dividend over time similar to what I would see in an individual stock, what would make this ETF different from others that do not have an increasing dividend trend over time?

Any comments or direction to sources that might help me understand this better would be really appreciated, thanks!

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Asked on January 7, 2021 7:52 am
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Thank you for the reply

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Posted by Francis Cahill
Answered on January 7, 2021 12:13 pm
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Hi there,

It is a really good question and one that i don't have a good answer for. You are however correct in that dividend growth in most ETFs don't match that of the companies themselves. The most glaring evidence of this is with the Canadian Dividend Aristocrat ETF. The ETF holds the top dividend growth stocks in the country, yet the distribution has been wildly inconsistent.

The main reason is that the ETF pays a distribution - not a dividend. A distribution contains many other things besides eligible dividends such as capital gains, ROC, interest income, foreign income etc. They also buy stocks, re-balance, have fees, etc. that all need to be taken into account. In other words, the distributions are not a direct replica of the combined dividends of the companies held. This is why my preference is building a portfolio of reliably dividend growth stocks to ensure that my income will in fact grow YOY.

If you are concerned with growing income YOY, then you must look at the historical distributions of that particular ETF to ensure they have a pattern of growing that dividend over time. Otherwise, build a portfolio of reliable dividiend growth stocks.

Mat

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Posted by Mathieu Litalien
Answered on January 7, 2021 10:10 am
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