Claymore’s New Dividend ETF – CUD

Are you going to chew the CUD?

Are you going to chew the CUD?

Last Tuesday September 13th 2011, Claymore launched their new ETF, Claymore S&P US Dividend Growers ETF, traded on the TSX as CUD-T. The Canadian Couch Potato just covered this ETF in a recent post Claymore’s New Dividend Grower.  As if there are not enough ETF’s on the Canadian market to entice investors, here is yet another one to ponder or “ruminate” on. Contrary to the trading ticker, this ETF has nothing to do with a cow – it’s a totally different type of animal. I’m a big fan of Claymore’s products, especially their laddered bond ETFs, but not this one.

This ETF tracks the S&P High Yield Dividend Aristocrats Index, made up of the 60 highest-yielding US stocks that have increased their dividends every year for at least 25 years. It is important to note this index is weighted by yield and not by market cap, an important point I’ll discuss further. In addition, since Claymore ETFs trade on the TSX, CUD is traded in Canadian dollars, and further employs a currency hedging strategy. CUD is suitable for Canadians investing in their RRSP’s, since the US dividends would be fully taxable if CUD is held in a TFSA or unregistered account.

Even After All These Years..

The basic premise of the Aristocrats Index (as well as the High Yield version) is that a company listed in the index must have increased dividends every year for at least 25 consecutive years. That’s right send your wife flowers for her birthday 24 years in a row, then forget this year and your toast! The Aristocrats Index does the same thing. A company that misses a dividend increase (or worse cuts the dividend) is out of the game for 25 years!  Before you fill up my comments, I’m not going to wade into the debate of the Dividend Aristocrats, because these companies have been solid pillars of the American economy for decades. Where I take exception is with the idea that this is the only screening criteria used for stock selection. But this is exactly what CUD does.

SDY versus CUD

As the Canadian Couch Potato pointed out in his recent post, CUD-T is nothing new. The SPDR S&P Dividend ETF (SDY) has been tracking this index since August 11th, 2005. SDY-N trades on the NYSE, and is therefore traded in US dollars and deemed foreign content. If you don’t care about currency hedging, and feel the Canadian dollar is about as high as it’s going to go, then consider buying SDY instead. You will end up following the same index, but for half the MER (Management Expense Ratio).  CUD has an MER of 0.60% (o.68% with taxes), whereas SDY has an MER of 0.35%. As with CUD, holding SDY in your RRSP, where the dividend income is not taxed makes more sense. If you don’t want to gamble on the Canadian versus US dollar, then CUD is the right choice for you.

This CUD Is Skewed

The index CUD tracks should not be confused with the S&P Dividend Aristocrats Index. The Dividend Aristocrats Index uses a market-cap equal-weighting, with no more than 2.99% weighted to any stock. This is similar to how most dividend investors would build their portfolios. As mentioned, CUD tracks the S&P High Yield Dividend Aristocrats Index. The main problem with the high-yield index is it does not employ an equal weighting to each stock. Rather it gives the top dividend payers a higher percentage, in order to create an overall higher yield.

What this strategy does in simplistic terms, is to place the higher yielding stocks as the top holdings, in higher percentages, and the lower yielding stocks as the bottom holdings in lower percentages. Therefore the portfolio of CUD is weighted to higher yielding stocks, which skews the overall portfolio to more risk and volatility. Remember there is no free lunch with dividends. A higher yielding company is paying a higher yield for a reason, therefore:  Higher Yield = Higher Risk.  Regardless of a 25 year dividend history, you need to look at the company fundamentals.

For example the largest component in this index is Pitney Bowes (PBI), which comprises 4.07% of this index in weighting, with a 7.20% dividend yield. Pitney Bowes has a dividend payout ratio of 89%, a current debt to equity ratio of 1,437.14 (yes you read that correctly), and a beta of 1.12. The company is mired in as much debt as it is worth. The second component of the index is Century Link Inc (CTL), which comprises 3.90% of the index. CTL is a US Telecom giant with a dividend yield of 8.30%, a dividend payout ratio of 142.8%, a debt to equity ratio of 98.63, and a beta of 1.39. The third holding is Cincinnati Financial Corp (CINF) which comprises 3.29% of the index, and has a dividend yield of 5.8%. CINF has a dividend payout ratio of 88.9%, but a much more stable debt to equity ratio of 16.59, and a beta of only 0.55. As you move down the list of the High Yield Dividend Aristocrats Index, the quality of companies improves, but conversely the weighting decreases – hence the higher yield.

The top 5 stocks in the High Yield Dividend Aristocrats Index compromise 17% of the portfolio weight. By investing in CUD you are taking the risk, even if it’s nominal, associated with these higher yielding stocks. Regardless of their dividend history, you are only getting a reward of a 3.68% dividend yield for the extra volatility.

Conversely, CUD underweight’s some of the best US dividend paying stocks such as MCD, JNJ, PEP, AFL, WMT, KO, and a host of others – albeit with a lower yield.  For example in this high yield index, McDonalds Corp (MCD) and Coca-Cola (KO) are only 1.5% each of the portfolio weighting, compared to Pitney Bowe’s 4.07% weighting. So in the High Yield Dividend Aristocrats Index, higher risk stocks are given more preference, and the lower risk stocks which still have stable yields, are weighted lower. In the end it all averages out to a 3.68% dividend yield, which for US stocks is quite attractive.

In my opinion, the strategy behind this index seems to be the complete opposite of what setting up a dividend paying portfolio should be. That is building a core of safe and conservative dividend paying stocks, in equal percentages, with a few of those as higher yielding stocks to boost returns. It may give you a lower yield than CUD, but it’s a safer way to go.

Will CUD Outperform the S&P 500?

SDY versus S&P 500

Click for larger image..

Is CUD worth the higher MER and cost of hedging? There is no evidence to suggest the High Yield Dividend Aristocrats have significantly outperformed the S&P 500 (which also includes small cap and non-dividend payers). See the chart to the left comparing the past returns of the SDY ETF versus the S&P 500 Index, and you will see the returns are very similar. The reason is simple math – the sum is greater than its parts.  CUD follows the same index as SDY, and yet SDY has not outperformed the S&P 500 Index. In other words you can save yourself some MER fees with a simple ETF such as SPY-N, albeit with a lower dividend yield of 2.00%.

Hedging the CUD

As per Claymore’s web page on CUD, it follows the “S&P High Yield Dividend Aristocrats CAD Hedged Index.”  Basically, this currency hedging will protect Canadian investors from a falling US dollar. But if the US dollar rises against the Loonie, then you will not benefit from currency hedging. There is really no right or wrong answer to using a currency hedging strategy when buying US securities – it’s really a personal decision. But right now most Canadian investors are buying US stocks in US dollars, because of the high Canadian dollar.

If you don’t like the idea of speculating on the rise or fall of either currency, then hedging makes perfect sense as you will basically reduce all volatility (potential losses) of any currency fluctuations.  In this case, CUD is the right choice. But you may also miss out on a nice gain if the US dollar rises against the Canadian dollar. For the latter SDY makes more sense.

You Don’t Need To Chew CUD

As mentioned you can buy SDY instead of CUD, for half the MER. However, investors interested in dividend paying stocks don’t need either CUD or SDY. They can go buy some of the constituents themselves, such as MCD, KO, PEP, ABT etc. with a discount brokerage account. And many investors could probably do it for less than the MER (Management Expense Ratio) of 0.60% (0.68% with taxes) which CUD charges.  The Passive Income Earner provides a list of the US Dividend Aristocrats. There’s no complexity there, pick your favourite stocks and away you go. You certainly don’t need to own 60 stocks like CUD, or 42 stocks like SDY, to have a solid dividend paying portfolio. Even ten of these stocks will give you a nice solid portfolio with a good dividend yield.

Conclusion

I’m certain for many investors this new ETF from Claymore, CUD-T, is exactly what they are looking for, a chance to purchase US Dividend Aristocrats for their RRSP. It may suit their investment objectives perfectly – those looking for income and dividend stock diversification, or without the capital to buy individual stocks. As well a 3.68% dividend yield is quite attractive for a basket of US dividend paying stocks. Claymore has also added currency hedging to CUD in order to protect Canadian investors from currency fluctuations. At the end of the day CUD is a very interesting new ETF from Claymore, but I need more time to “ruminate” on this one.  So far it’s not a Ninja buy.

Readers, what’s your view?  Are you going to chew the CUD?

14 Responses to “Claymore’s New Dividend ETF – CUD”

  1. DIY Investor

    Sep 20. 2011

    I agree with your analysis. Stretching for a bit more yield has been the downfall of many investors over the past few decades. Unfortunately, investors have been pushed towards this by monetary policies that have pushed yields to historically low levels.
    You are exactly right that the small pickup in yield in CUD doesn’t compensate the investor for the additional risk and just looking at one screening criteria can be dangerous.
    I agree also that buying 10 well chosen/well researched dividend payers would be the better route for those with sufficient funds.
    No comment on the hedging. I’m afraid the U.S. Federal Reserve is on a mission to destroy the value of the U.S. $.

    Reply to this comment
  2. My Own Advisor

    Sep 20. 2011

    Great post.

    If folks are looking for good yield, inside their RRSPs, with CDN hedging and no direct stock ownership, then this is the guy for them. A great product from that perspective for many DIY investors. Well done Claymore.

    For me, I’m looking to buy some of the CUD holdings directly over the next few years, with the exception of AT&T. The yield on this guy is great. Regarding AT&T, no matter what’s going on in the world or currency markets, people aren’t going to suddenly give up their telephones, mobile phones, or broadband internet connections. AT&T, or Verizon, for that matter, are winners. Unfortunately both don’t meet CUD’s criteria.

    LOL: “…send your wife flowers for her birthday 24 years in a row, then forget this year and your toast!”

    I’d be toast.

    Reply to this comment
  3. The Wealthy Canadian

    Sep 20. 2011

    If anything, I think this ETF provides the dividend investor a good resource to rely on when seeking new stock positions to own directly.

    I’m not fond of this product and don’t see myself ever owning it; however, as CPP mentioned on his post, there are some great blue chip companies within this fund to take note of.

    Ninja – great job bringing to light the higher yielding positions having greater weightings. Add that to the fact that the dividends earned are not eligible for the tax credit, this one’s a no-brainer in my view.

    With that being said, I’m not suggesting that Claymore doesn’t offer great products – on the contrary. For example, I’m a big fan of CLF and it’s been on my radar for for some time now.

    Great post! 🙂

    Reply to this comment
  4. Think Dividends

    Sep 20. 2011

    In your performance comparision of SPY vs. SDY your chart is a Price Return Chart and doesn’t take into account the dividends paid by either ETF. Assuming that SDY paid 4% and SPY paid 2% over the entire period, the Dividend ETF would have outperformed by 10% over the last 5-years.

    I don’t like this ETF for its weighting scheme either. In this index, high yield = slow/no growth. Pitney Bowes is a prime example of this.

    Reply to this comment
  5. Eric

    Sep 20. 2011

    Great post Ninja !

    It’s too bad Claymore didn’t use instead the ”Broad Dividend Achiever Index” like PFM (PowerShares).

    Reply to this comment
  6. The Dividend Ninja

    Sep 22. 2011

    DIY Investor

    Thanx for dropping by and posting Robert. Yup, the small pickup in yield certainly doesn’t offset the risk, does it? And as you point out, would you build your whole portfolio on one screening criteria?

    My Own Advisor

    Hey MOA, I’ll disagree with you one this one my friend – this ETF is not well done by Claymore. The skewed weighting is reason enough to run, especially in the downward market like today. I’m wondering why Claymore chose the “High Yield” Aristocrats index and not just the “Dividend Aristocrats” index. The latter I think would have been a much better choice with equal weighting in stock positions.

    PS
    Don’t forget flowers on her 25th birthday!

    Wealthy Canadian

    Thanx for posting! Yes some good companies in the CUD portfolio, but why buy the ETF to buy stocks you don’t want to own – especially when you have the capital to make that decision. Good point.

    Think Dividends

    Thanx for posting, and bringing light to my charting overisght. And another good point about high yield = slow growth. I brought that point up in my Dividend Payout Ratio article. Nonetheless you and I agree “yield weighting” is not a good way to go.

    Cheers

    Eric

    Thanx for posting Eric! Yes there are many solid blue-chip indicies Claymore could have used for this ETF. I’m wondering why they just didn’t use the plain “Dividend Aristocrats” Index. I guess they are after a higher dividend yield…

    Reply to this comment
  7. My Own Advisor

    Sep 23. 2011

    Fair enough Ninja, although I do see this ETF filling some space in the marketplace, weighting risk and all, for a few investors. Those investors just don’t happen to be me.

    I think your post really brings to light the risks of many ETFs, some aren’t plain vanilla whatsoever.

    Reply to this comment
    • The Dividend Ninja

      Sep 23. 2011

      MOA You bring up a really good point! It’s getting more difficult to find plain vanilla index ETFs. Thank goodness we have the Couch Potato to help us out 😉

      Reply to this comment
  8. MoneyCone

    Sep 23. 2011

    I couldn’t help smile at this: “That’s right send your wife flowers for her birthday 24 years in a row, then forget this year and your toast!”

    🙂

    Reply to this comment
  9. Bobl

    Feb 03. 2015

    Since you wrote this post CUD.TO has outperformed SDY (not including dividends) by about 10%.

    Reply to this comment

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