Steal These 5 Dividend Stock Ideas From a Market-Beating ETF

And why such vehicles are valuable idea generators

The Dynamic Active Canadian Dividend ETF has been an excellent performer since it was created in 2017.

After the… let’s call it generous management fee of 0.78%, this ETF delivered a total return of 10.2% annually from inception through the end of 2023. That’s enough to turn a $10,000 original investment into something worth $19,640.

And remember, that return is after fees. The total return before fees is close to 11% annually.

The fund handily beat the TSX Composite Index, as represented by the ETF XIC. It has returned 9.71% per year — including reinvested dividends — versus 7.96% for the index.

This was the earliest starting date I could find results for

Unlike many other types of dividend ETFs, the Dynamic Active Canadian Dividend ETF takes a more fundamental approach. It utilizes a bottom-up investing approach that focuses on fundamental investing analysis. It looks for companies that are attractively valued, have high margins, good market share, and are ran by good management teams. It doesn’t just blindly buy the biggest dividend payers or the stocks with the highest dividend.

You’ll notice there’s really no mention of the dividend yield or potential dividend growth in that description. That’s because the managers of this fund — which is 1832 Asset Management, a money manager owned by Scotiabank — think that dividend growth ultimately comes from the strength of the underlying business. They also don’t worry about dividend yield at all. The portfolio is a mix of high and low yielders that average out to a yield of a little under 3%.

Finally, this ETF has a small wrinkle compared lot of its peers. It can hold up to 30% of the portfolio in U.S. names. As of the end of March, about 12% of all assets are invested in the U.S.

The strategy is obviously working. Morningstar ranks it as a 5-star fund, even going as far as awarding it a Medalist Rating, which it reserves for the best funds in its investing universe.

Let’s take a closer look at this ETF, including why stealing ideas from such investments can be such a powerful tool for the average investor.

First, a glimpse into the portfolio.

Top 10 holdings

I was a little bit surprised when I saw the top holdings, since they look pretty much the same as most dividend ETFs. It’s stuffed with Canada’s top banks, insurers, and pipelines — just like most every other Canadian dividend ETF.

With the exception of Onex, this looks like the top 10 holding list of most Canadian dividend ETFs. Nothing exciting here.

Despite having a top-10 holding list that looks pretty much like every other Canadian dividend ETF, it has managed to outperform. That’s because, lingering outside the top 10 stocks, are some pretty interesting names. This this is a relatively concentrated fund — it has approximately 40 total investments — so stocks just outside of the top 10 can still have a big impact.

Ones like PrairieSky Royalty Ltd. (TSX:PSK), which holds royalty interests on various oil and natural gas fields in Alberta, Saskatchewan, British Colombia, and Manitoba. These guys get paid for each barrel of oil extracted, all without taking on exploration risk, buying equipment, or hiring employees. It also offers zero capital expenditures, operating costs, abandonment, or environmental issues — those are all undertaken by the operator. Plus, it still has upside potential if the price of oil goes higher.

The company has grown nicely over the last five years, with revenue essentially doubling from $268M in 2019 to $513M in 2023. Free cash flow — the company’s preferred valuation method — came in at $325M in 2023, or about $1.36 per share. That puts the stock at a very reasonable 20x free cash flow — a fair price for long-life assets like the ones PSK owns.

Plus, the PrairieSky royalty machine continues to grow. In 2014, the company owned 5.2M acres of royalty lands. These days that number is 18.2M acres, and production from these assets is up 8% on a year-over-year basis.

Finally, PrairieSky pays a well-covered 3.6% dividend (its payout ratio is approximately 60% of free cash flow), and it has grown the payout consistently since 2021.

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The rest of the best

Another great stock owned by the Dynamic ETF is Franco-Nevada Corp (TSX:FNV), which owns gold, silver, and other precious metal royalty streams. It has grown into a true monster, owning 118 different cash flowing assets around the world. It also has an additional 300(ish) assets that are in various stages of development, which are expected to deliver cash flow back to the parent as these mines come online.

Give it a few years and Franco-Nevada’s portfolio will absolutely gush cash.

Despite Franco-Nevada owning such a diversified portfolio, investors are overly focused on Cobre Panama, a mine currently shut down after it became a political lightning rod in its home country. But a solution may be coming — a scheduled May election in Panama will reduce uncertainty and if that doesn’t achieve a satisfactory result, then the dispute will be tried in international court.

Even without Cobre Panama, Franco-Nevada has delivered excellent long-term returns, has grown its dividend in 17 consecutive years, and has a pristine, debt free balance sheet.

Another excellent performer owned by the Dynamic ETF is WSP Global (TSX:WSP), which is a professional services consulting firm that operates in Canada, the United States, Europe, Australia, and other jurisdictions. Essentially, it’s an engineering firm that helps bring ambitious and complex projects to life. It worked on such assets as the new NFL stadium in Las Vegas, the Arthur Ravenel Jr. Bridge (which is the longest cable-stayed bridge in the Western Hemisphere) and One World Trade Center in New York City.

Investors like the business because it offers very little project-level risk, underlying long-term growth potential in global infrastructure spending, and potential growth through acquisitions as it buys smaller competitors. The company has grown the top and bottom lines by double digits each year since 2021, and analysts predict growth will continue with earnings jumping by 15% in 2024 to $7.94 per share.

The last couple stocks have been more growth plays, so let’s give a little love to one of this fund’s top holdings that also pays a pretty massive dividend. Power Corporation (TSX:POW) is a holding company that has stakes in some of Canada’s largest financial companies — namely Great-West Life, a conservatively-managed life insurer — along with some stakes in some really interesting Fintech names like Wealthsimple and Personal Capital.

Power trades at 8× 2024’s expected earnings, with a history of growing the bottom line over time. It pays a 6.1% dividend that has steadily increased with earnings, all while offering a payout ratio in the 50-55% range. Dividend investors get it all with this one — a generous payout that also comes with growth potential as it invests in various promising fintech companies.

I profiled Power Corporation on the premium side of the newsletter here. 

Finally, let’s end with the bank stock I most recently added to my portfolio, and is a 3.6% position in the Dynamic Active Canadian Dividend ETF. TD Bank (TSX:TD) is currently unloved, ignored, and selling for close to a 52-week low. It has drastically underperformed its peers as of late — even losing out to Laurentian Bank (TSX:LB), which is so badly managed nobody wanted to buy it.

I think today is an excellent opportunity to amass TD shares. The company has a clear catalyst coming up when U.S. regulators make a decision on how much it’ll get fined for recent money laundering-related wrongdoings. That uncertainty is a main reason why the stock is depressed. The stock is also trading at slightly under 10x 2025’s earnings expectations, offers a well-covered 5%+ dividend, and trades at an attractive valuation.

If that’s not enough for you, the company’s Canadian operations are top notch. Many analysts and pundits have declared TD Canada’s best managed bank. It also has solid long-term potential to expand operations in the United States. Put it all together, and I’m happy to buy this long-term winner when the stock is depressed.

The bottom line

The Dynamic Active Canadian Dividend ETF is a pretty impressive fund, beating the TSX Composite over the long-term despite being handicapped by an almost 1% management fee. Its managers are clearly doing something right.

Which is why such funds are great places to find investing ideas. We’re just copying ideas that work.

Plus, us copiers have a fundamental advantage over investors in that fund. We don’t have to pay the fee. That alone helps returns.

I’m a shameless copier of ideas. It’s just good investing. But I’ll end with a word of caution. Without proper research into these names you’ll lack the conviction to hold them when the stock falls. Steal ideas liberally, but be certain you know the underlying company well.