Looking for Market Defence? Canadian Dividend ETFs Are a One-Stop Solution

Canadian dividend exchange-traded funds (ETFs) are not truly defensive investments in the same way as bonds or cash are. At the end of the day, they are still 100% equities. When markets sell off hard, they will fall along with everything else.

But there is an underrated psychological advantage to holding dividend-paying investments, especially for newer investors. When your portfolio drops, it is easy to panic and sell at the worst possible moment. Behavioural finance has long studied this phenomenon. Prospect Theory suggests that investors feel the pain of losses much more strongly than the pleasure of gains.

Dividends can help counteract that impulse. If you know a payment is coming every month, it can make it easier to stay invested through downturns. Instead of panic selling, investors may focus on reinvesting those dividends while prices are lower. This works best when the underlying companies have a strong record of maintaining or increasing their dividends even during difficult economic periods.

That is why I generally prefer dividend growth strategies over high-yield ones. The headline income may be lower, but the long-term snowball effect can be far more powerful. Companies capable of growing their dividends tend to be financially stronger and more durable.

If you want a single ETF that adds a dividend-growth tilt to your Canadian equity exposure, one option to consider is Hamilton CHAMPIONS Canadian Dividend Index ETF (TSX:CMVP). Here is how it works.

What is CMVP?

CMVP is a passive ETF. Hamilton is not actively selecting stocks. Instead, the fund tracks the Solactive Canada Dividend Elite Champions Index. This index holds an equal-weight portfolio of Canadian companies that have demonstrated a consistent history of stable and rising dividends. To qualify, companies must have at least six consecutive years of dividend growth with no cuts.

That screening process naturally pushes the portfolio toward established, financially stable companies. According to Hamilton, the average company in the index has a market capitalization of about $99 billion and an average annual dividend-growth rate of roughly 10%. That places most of the holdings firmly in the large-cap blue-chip category of the Canadian market.

Sector exposure broadly resembles that of the Canadian market, but with some notable differences. Financials make up the largest portion at 33.6%, followed by materials at 18.8% and industrials at 15.3%. Energy is less prominent than in many Canadian ETFs at about 9.2%, which can slightly reduce volatility. Consumer staples are also overweighted at roughly 7.6%.

CMVP risk and returns

CMVP itself has not been trading long enough to build a lengthy performance history. However, the underlying index provides backtested data that gives some insight into how the strategy has behaved.

From 2006 through the present, the benchmark delivered an annualized total return of about 10.3% with dividends reinvested. Over the same period, the S&P/TSX 60 produced an annualized return closer to 8.9%.

The index also experienced slightly smaller losses during major downturns. The maximum drawdown, which measures the worst peak-to-trough decline, reached 45.5% compared with 48.1% for the TSX 60.

Recovery time was another difference. The dividend-growth index recovered from its worst decline in about 632 days, while the TSX 60 took roughly 1,709 days to regain its prior peak.

Today, CMVP offers a dividend yield of about 2.77%, calculated by annualizing the most recent monthly distribution relative to the fund’s net asset value.

Costs are also competitive. The ETF charges a 0.19% management fee, which is significantly cheaper than some older Canadian dividend-growth ETFs that still charge expense ratios closer to 0.6%.

The post Looking for Market Defence? Canadian Dividend ETFs Are a One-Stop Solution appeared first on The Motley Fool Canada.

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Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.