Jonathan Needham, Vice President at TD Asset Management (TDAM) takes a deep dive into dividend strategies
“I think the great thing about any dividend strategy,” reflects Jonathan Needham, Vice President, ETF Distribution - Eastern Canada at TD Asset Management Inc. (TDAM), “is that it's really meant as a core component of a portfolio. It really can be a core holding for anyone at any stage and in their life in terms of creating their wealth, even young folks.”
Needham, however, isn’t just focusing on any dividend strategy. With a range of dividend ETF products, TDAM has a number of offerings tailor-made to “appeal to an investor that is looking for lower volatility and a higher income stream … somebody that is seeking a steady ascending stream month over month … those that are a little bit more conservative with their investing dollars as well as those that are interested in cash flow for things like retirement.”
“I would say that the biggest differentiator in some of our ETFs is really the fact that we're fundamentally active in terms of stock picking. We also differentiate by addressing what we see as shortfalls in existing mandates that are in the Canadian landscape, most of which are very rules-based and systematic in nature … which tends to result in concentration in regions or sectors, maybe producing attractive yield, but not focusing on total return. And this is where we believe the 4% yield can be better than 8%. We differentiate there by focusing on total return and bringing an active approach within our ETFs, with the goal of offering a respectable yield at the same time as growing the portfolio. This is in contrast to some strategies that may provide the 8% today but sacrifice growth for tomorrow.”
So – what exactly are the varying ETF products that really set TDAM apart from the competition?
Think Global
The TD Active Global Enhanced Dividend ETF (TGED) at its core invests primarily in dividend-paying equity securities of companies located in developed markets around the world – and is, Needham enthuses, “one of our most successful offerings in the Canadian market.”
“We pick the stocks, we write the calls and then we aim to turn stocks that don't pay dividends into dividend payers. In addition, we write puts leveraging the cash in the portfolio to maximize the yield on our cash and get paid to find stocks that we like (when writing a put, you are effectively getting paid a premium to enter into a buy limit order on a stock lower than the current stock price). That's really what we're trying to do every single day. That's our rinse and repeat. And what that has provided to the marketplace is enhanced yield relative to the broad market.”
There is also the TD Active U.S. Enhanced Dividend ETF (TUED) which, Needham explains, is “very similar in terms of the stock picking and options overlay strategy that we're employing – but obviously with an emphasis on purely U.S. exposure.”
A Quantitative Approach right here in Canada
Finally, there is the TD Q Canadian Dividend ETF (TQCD), which is aimed at “those investors who are seeking Canadian exposure with a higher dividend yield greater than the broad market.”
“TQCD is run in a quantitative nature. It's very unique relative to other products in the market in Canada. And what's unique about our strategy is our in-house proprietary risk model which screens the Canadian Universe to exclude non dividend paying names and names with a weak financial stability metric, and then our model seeks to add alpha by focusing on names with dividend yield, growth and sustainability of that dividend.
“We also have risk controls in place to essentially top out how much exposure we would have in any one sector - 25 to 30 (no greater than 30) percent as an example (and no individual security greater than 6%). We’re looking at reducing sector risk and reducing individual security risk. The outcome is a smoother ride and a better diversified product than a lot of other options are in the marketplace - especially for Canadians that already tend towards home bias.”
That home bias, Needham explains, is something that can have an impact on a portfolio – and something that the TD dividend ETF strategies seek to rectify.
“Canadians in general tend to have a home bias and invest a majority of their portfolio in Canadian equities, ” he says. “They already have too much exposure to a few specific sectors. They're missing out on technology and healthcare in particular, which make up the two largest sectors of the U.S. market.”
“So we've focused on bringing active strategies to the Canadian marketplaces. And when it comes to the Canadian exposure, we want to reduce the concentration risk. We also want to encourage Canadians to go more broadly outside of our borders to countries’ sectors with companies that are paying more attractive dividend yields that are more sustainable over time. We want to make sure we are providing investors compelling choices which encourage them to go outside their home country.”
“Our focus at TDAM is always to serve the Canadian investors and what's in their best interest. And we think it's in their best interest – particularly when looking at enhanced dividend strategies or sector strategies (like two of our other offerings, TD Global Technology Leaders Index ETF (TEC) & TD Global Healthcare Leaders Index ETF (TDOC)) – that they consider going global to provide better diversification benefits and opportunities. We believe it will ultimately help provide better outcomes for their portfolio.”
“We're always looking at providing additional strategies to the marketplace as we build out our ETF lineup,” Needham concludes. “We always work through the lens of: how do we serve Canadian investors and provide them solutions that can best serve them in building a diversified portfolio.
