The Canadian TSX Aristocrats: Part-1

Image courtesy of
Image courtesy of

This is a two-part series that examines the S&P TSX Canadian Dividend Aristocrats Index. Part-1 examines the index methodology. Part-2 of the series looks at CDZ, the iShares ETF which tracks this index.

In a previous post, staff writer Hank Coleman covered the U.S. Dividend Aristocrats.  These stocks are based on the selection criteria of the S&P Dividend Aristocrats Index. As Hank wrote in his post, a company not only has to be a dividend payer for 25 years in row, it must also raise the dividend for 25 consecutive years.  If it fails on any two of those accounts, it’s out of the index.

Considering the carnage of the 2008 to 2009 Financial Crisis, that is a remarkable achievement indeed. Ben Carlson also pointed out the benefits of investing in The Dividend Aristocrats. In his post SDY Dividend Aristocrat ETF, Ben writes:

“These are high quality large capitalization companies with plenty of sustainable free cash flows available to pay out to their shareholders. Companies that are able to do this on a consistent basis are a dividend investor’s dream.” (Ben Carlson)

No wonder dividend investors keep a close eye on these U.S. titans for their portfolio.

The S&P/TSX Canadian Aristocrats Index

There is also a Canadian version of the Dividend Aristocrats, aptly named the S&P/TSX Canadian Dividend Aristocrats Index. It represents some of the largest (and not so largest) companies in the Canadian economy, which trade on the Toronto Stock Exchange (TSX). However, it pales in comparison to its U.S. counterpart.

The criteria for a TSX Aristocrat are as follows: 1

  1. The company’s security is a common stock or income trust listed on the Toronto Stock Exchange and a constituent of the S&P Canada BMI.
  2. The security has increased ordinary cash dividends every year for five years, but can maintain the same dividend for a maximum of two consecutive years within that five year period.
  3. The float-adjusted market capitalization of the security, at the time of the review, must be at least C$ 300 million.
  4. For index additions, the company must have increased dividend in the first year of the prior five years of review for dividend growth. This rule does not apply for current index constituents.

This Index is No Aristocrat

When you compare the TSX Aristocrat Index to the S&P 500 Dividend Aristocrats Index, the differences are significant (see methodology). You’ll immediately notice the 5 year dividend-growth criteria for the TSX Aristocrats instead of a 25 year U.S. requirement. Many have questioned the validity of only a 5 year dividend-growth period. They point out a 10 year period of dividend-growth would have been a more stringent and appropriate measure.

Thomas Cameron of Dividend Assets Capital, who managed the Dividend Growth Investors Fund, used exactly that criteria. The Passive Income Earner wrote a post about dividend investing with the 10/10 rule, and has adopted the strategy into his portfolio.

You will also notice that a Canadian TSX Aristocrat can skip the dividend increase, keep the same dividend for 2 years, within that 5 year period. In other words, if the company doesn’t raise the dividend for one year it’s still an Aristocrat.

Finally, a Canadian TSX Aristocrat only needs a market cap of 300 million, which is a small-cap company by definition.2 A U.S. Aristocrat on the other hand, must have a minimum market capitalization of 3 billion. There are many companies in Canada with a market cap in the billions, including banks, telecoms as well as companies in the energy and materials sector.

Even with economies of scale, the criteria for the Canadian Aristocrats are nowhere near the tough criteria which are required for a U.S. Aristocrat – not even close.

Softening the Rules

In light of the 2008 to 2009 Financial Crisis, many stalwart Canadian dividend payers lost their TSX Aristocrat status, and were cut from the list. The Canadian Banks for example didn’t raise their dividends during the crisis, and were removed. At the end of the carnage, there were less than the required 40 companies left, which could make the grade.

As a result, the S&P TSX Aristocrats needed new constituents or faced being a small or non-existent index. In 2012, Standard & Poor’s decided not to reduce the number of constituents to the index. Instead for 2013, they decided to amend the second point listed above, and add the 2 year exemption for the dividend. That meant a TSX Aristocrat didn’t even need to increase its dividend for the full five years. As long as it didn’t cut or suspend the dividend, it could put the dividend-increase on ice for a year, and still be an Aristocrat.

This was an unfortunate mistake on the part of Standard & Poor’s. Five years is a minimal dividend-growth history, and is virtually meaningless if it doesn’t increase over the full five-year period. In addition, a U.S. Dividend Aristocrat would be out the door without question if it didn’t raise its dividend. When you put it all together, although the index is named the TSX Aristocrat Index, it really has nothing to do with being an Aristocrat.

In Part-2 I’ll look under the hood and pull apart CDZ, the iShares ETF which tracks the S&P TSX Canadian Dividend Aristocrats Index. I’ll also look at the constituents (companies) of the index more closely. Many of these companies do not have solid fundamentals, and are not true dividend-growth companies. Some are previous Income Trusts with high-yields and high-debt. They certainly are not Aristocrats.

Readers, what’s your take? Are you a fan of the TSX Aristocrats? Do you agree with the S&P methodology?


1. For more info, download the PDFS&P/TSX Canadian Dividend Aristocrats Index Methodology.  See page 4 under Eligibility Criteria.
2. Definition of a small cap stock from Wikipedia.

19 thoughts on “The Canadian TSX Aristocrats: Part-1”

  1. Hey Avrom, how many companies do you think is needed to make a representative index? DJIA only has 30 companies and is one of the most tracked indices in the world. So I’m guessing not letting the TSX Aristocrats fall under this number was important to their decision to loosen the rules.

    • Hi Brian,

      That’s a really good point! I don’t know how many stocks you need. Index investors would argue the more the better. Vanguard’s VTI holds over 3650+ stocks as an example.

      According to Lowell Miller in “The Single Best Investment” (pg. 172), the magic number is indeed 30. That works out to 3.3% weighting for each company.

      Less than 20 stocks creates too much volatility in a portfolio. He found more than 30 stocks didn’t make much difference, and too many stocks was simply replicating an index.


  2. Hi Ninja,

    It makes little sense why S&P is so loose with their criteria. They have 66 companies in their index, and could easily still have 30 with a more strict 5/5 criteria. And they would have done a lot better without a few major duds.

    • D-S, wait for Part-2! – hopefully next week. 😉

      I’ll go more into the CDZ ETF which tracks this index, and go into more detail about individual companies in the index. Some of these companies are great, and some are definitely not.

      I’ll also be providing links to other blogs that have discussed CDZ and the index.


  3. Thank- you for your excellent article. I look forward to Part II.
    I have a portfolio of largely Canadian dividend growth stocks, and a few of the US aristocrats. I would prefer to have the weighting the reverse as the diversity and quality of US stocks is so much greater, but the Canadian dividend tax Credit is compelling. Do you find the trade off worthwhile? Having a clawback to US dividends is a big disincentive to me, notwithstanding the excellence of the US companies.

  4. I’m really interested in the TSX at this point. It’s been beating down severely over the last 18 months. A considerable amount of value for sure.

    • Hey Marvin,

      I wouldn’t say the TSX has been beaten up. It’s actually been steadily rising, albeit a little choppy. It has definitely been lagging the DOW and S&P.

      Some constituents in the TSX have certainly been pummeled such as the gold producers, potash corp. REITs etc. And the banks haven’t been record breaking either. So there are certainly some good buying opportunities if you are willing to pick away.

      I’m quite interested in REITs and commodities right now. 😉


  5. Thanks for the CDZ methodology link, a real eye opener, and an opposite of what we wanted for a fund whose companies grow their dividends. I totally disagree with their rebalancing methods as it seems the stronger market performers are being sold off quarterly as yields fall and the weaker ones added to, and since we have CDZ as a monthly PAC in our TFSAs we will have to rethink holding and adding to it. What we really want is more CSU and less AGF. Looking forward to Part 2.

    • Spanky,

      Your absolutely right, by loosening the rules, smaller cap and companies with unsustainable dividends (in my opinion), are being added to the list. This is what I don’t understand about ETFs. If you wouldn’t buy AGF, and other holdings comprised therein, then why would you own this ETF?

      There are definitely better options than CDZ. One clear example is buying some of it’s holdings directly, i.e. BCE, ENB, and FTS among others.

      I think your decision to offload this ETF is prudent. If you prefer ETF investing (indexing) to buying dividend paying companies directly, I think XIC and XIU are much better options. Albeit a lower yield, but much safer holdings and better quality companies.

      Have you looked at Rob Carrrick’s “Two Minute Portfolio”?


      • Hi Ninja,

        Yes the 2MP would be very good for a sizable cash portfolio where broker fees were not a major concern and that was big enough to achieve diversification for the account. Also a focus on income would be a top objective.

        The CDZ we have is in a smallish ($240) monthly PAC into a TFSA, and is one of the few ETFs that permit PAC, though it seems quite a few Claymores do this. I think what would mesh with my philosophy, from what I can deduct, is an ETF that has momentum and growth as primary goals, where current income is less important than future, and where growth of the company will pull along the rise in dividend income, even if it isn’t raised every year, can even be lumpy.

        What I believe might be a better fit for my goal is an ETF like First Asset’s WXM or YXM, offering a similar MER to CDZ, where winners aren’t sold back, and past performance SI has been twice TSX; I hope you don’t have less than raving reviews coming out on them. I can take 95% of the current holding of CDZ (18 months contributions) and trade into WXM for just $5 brokerage, then continue the free PAC into CDZ with a view to rebalancing funds in future to other ETFs such as YXM. Any opinion on such a strategy?

        Thanks, Spanky

          • Ninja, In a TFSA especially I don’t see anything wrong with trying to do better than an index fund. That’s why we also have HAC, the seasonal ETF in the acct. I’ll push ahead with the WXM plan & let you know how it works out.


  6. Avrom
    When the part II?

    I am interested also to know your approach whether it’s better to buy the holdings directly or try to buy some other ETFs rather than CDZ, i.e ZDV



Comments are closed.