I never quite understood the tendency of some investors to favour similar stocks in identical sectors over another sector. After all, investing isn’t exactly a team sport, and there’s no reason why diversifying between two closely related picks isn’t do-able.
A common debate I see is between Fortis (TSX:FTS) and Emera (TSX:EMA). Both are low-volatility dividend stocks and fairly popular among defensive Canadian investors seeking greater income potential.
My take on the debate? Consider the Horizons Canadian Utility Services High Dividend Index ETF (TSX:UTIL) instead, which not only holds Fortis and Emera, but also eight other top Canadian utility, pipeline, and telecom companies.
Why I love UTIL
UTIL is one of those ETFs that ticks the boxes of most Canadian dividend investors’ dream checklist. The utility-focused ETF:
- Holds 10 of the leading Canadian utility, telecom, and pipeline companies.
- Pays an above-average estimated annual dividend yield of 3.83%
- Pays dividends on a monthly basis.
For utility companies, UTIL holds Brookfield Renewable Partners LP, Brookfield Infrastructure Partners LP, Fortis, Emera, and Hydro One.
For pipelines, UTIL holds Enbridge and TC Energy Corp. For telecoms, UTIL holds Rogers Communications, Telus, and BCE.
I’m willing to bet that a lot of readers already have these dividend stocks in their portfolio or watchlist.
Best of all, each of these stocks is equally weighted in UTIL’s portfolio, which severely reduces concentration risk.
The benefits of UTIL
Another reason I like UTIL is the professional management. Imagine owning a portfolio of the 10 stocks mentioned above – you would have to keep track of 10 separate dividend payments, buy and sell each periodically to re-balance, and avoid making emotional mistakes like chasing winners and selling losers.
UTIL does that all for you. The ETF re-balances periodically back to equal-weight allocations, which naturally buys low and sells high. It spits out a monthly distribution, versus the quarterly dividend many of its underlying stocks pay. All you need to do is buy more and hold patiently.
For this service, UTIL charges a management expense ratio of 0.62%. Pricey for sure, but I expect it to come down later once the ETF attracts more assets under management, or AUM.
The Foolish takeaway
Don’t get caught up in the Emera versus Fortis debate, or any other debates like this. In my opinion, investors should always focus on maximum diversification. Have your eggs in many baskets and play it safe and slow.
An ETF like UTIL is a great way to not only gain exposure to Emera and Fortis, but also eight other leading Canadian utility, telecom, and pipeline companies with the benefit of higher than average monthly dividend potential.
