PSBKF - 3 Dividend ETFs I Am Greedily Buying In 2023

Summary

• In 2023, most of the market's interesting opportunities are in dividend-paying sectors.
• Tightening has a negative effect on the value of high growth opportunities.
• In the meantime, the Fed is likely to do one or two more small rate hikes.
• All of these factors favor value and dividends.
• In this article, I will explore three high-dividend ETFs I'm greedily buying in 2023.

In 2023, I’m greedily buying up dividend stocks. That includes several high quality exchange-traded funds, or ETFs, that offer decent yields at low cost. Right now, my individual dividend stocks include Canadian and U.S. banks, as well as some tech stocks. My tech dividend stocks don’t offer much yield, but I’ve upped my portfolio’s overall yield by adding some foreign funds and sector funds. In many cases, these funds aren’t even advertised as “dividend funds,” but nevertheless offer above average yields.

Today's macro climate incentivizes buying dividends and value instead of growth. Jerome Powell has been hiking rates for a whole year, and most think that he still has another hike or two to come. The higher interest rates go, the less valuable growth becomes, because rising rates decrease the value of rising cash flows. They reduce the value of all cash flows, but the effect is most severe on cash flows expected to grow rapidly. For this reason, it's smart to buy value/dividend ETFs in 2023, instead of growth stocks. In this article, I will cover the three dividend ETFs I’m greedily buying in 2023.

Global Stocks

One of my biggest ETF purchases in the last year was the Vanguard FTSE All-World ex-US ETF ( VEU ). This is an ETF that holds primarily European and Asian equities. I don’t mean to brag, but my first buys in this fund were quite well timed. I bought late last year, near the bottom for Chinese and European stocks. As a result, I’ve managed to collect a 15% return on the fund so far.

What’s the yield on VEU?

If you look at VEU’s website, you’ll see four distributions in 2022:

• $0.6186.

• $0.2613.

• $0.578.

• $0.106.

These distributions sum to $1.56. VEU costs $53.85. So, the yield is 2.9%. That’s nearly double the S&P 500’s yield , and this doesn’t even require a dividend-biased strategy, just an allocation in foreign stocks!

Is buying foreign stocks a good idea apart from the yield they offer?

It’s a controversial topic, but I lean toward yes. These days, many of the top foreign stocks are Chinese, and some think that they are at risk of being delisted in the United States. The ones dual-listed in Hong Kong will stay in VEU, but ones that only have U.S. listings could be delisted. Apart from that, though, China’s GDP growth has been forecasted at 5.2% this year, while its stocks trade at just 13 times earnings . Most likely, China will make a positive contribution to VEU’s performance this year.

Europe is a tougher call. EU stocks trade at about the same earnings multiple as Chinese stocks, but without the high expected growth. I wouldn’t expect European stocks to deliver much in the way of capital gains, but they should produce decent dividends. With VEU, you can gain access to those dividends (plus Asian and other foreign stocks) for a tiny 0.07% MER.

U.S. Financials

One ETF I’ve been buying recently is the Vanguard Financials ETF ( VFH ). It’s an ETF of U.S. financial stocks consisting of assets like:

• Banks.

• Credit card companies.

• Vaguely financial holding companies like Berkshire Hathaway ( BRK.B ).

If you’ve been reading my articles for a while, you’ll know that I’m a big fan of financials this year. Two of my biggest stock holdings are Bank of America ( BAC ) and TD Bank ( TD , TD:CA ), and I have some exposure to the other big banks via VFH.

Why do I like financials so much? As I explained in past articles , banking is among the few sectors that can gain from interest rate hikes. If interest rates go up, and the yield curve doesn’t invert too much or lead to a recession, then bank profits tend to go up along with the interest rates. Presently, the yield curve is in fact inverted , but bank profits are behaving as we’d expect in a tightening environment anyway. That is to say, net interest income is rising at most of them, while net income is rising at a few top performers.

I’m comfortable enough with individual banks that I’m holding the bulk of my dividend portfolio in the form of BAC and TD. However, I like the exposure to non-bank financials that you get with VFH. This is a space in which I’m less able to analyze individual companies, so the diversified exposure is worth having.

Take credit card companies, for example. I know enough about the banks’ credit card portfolios to know that credit card fees are rising. When credit card usage rises, as it’s doing now , Visa ( V ) and Mastercard ( MA ) collect more fees. I can infer that credit card companies as a whole will do well because I know credit card spending is strong. However, my portfolio already has nine individual stocks–launching research projects into V and MA would take away from time better spent on maintenance research. Knowing this, I’ve opted to get V and MA exposure via VFH.

Apart from liking banks as a whole, I also like VFH’s fund characteristics. It has a weighted average P/E ratio of 13.14, which is less than that of the S&P 500. It has a super-low 0.10% expense ratio. Finally, it has a 2.15% yield , which might not seem high, but does beat the yield on the S&P 500 by about 0.56%.

Chinese Banks

Last but not least, I have been buying Global X MSCI China Financials ETF ( CHIX ) in 2023. This one is a true high yielder, with a 5.96% yield and a mere 10% withholding tax . As an American or Canadian investor, you might be used to hearing in the media that China is very hostile to the West. Perhaps it is in some ways, but it actually charges lower dividend taxes to foreigners than the U.S. and Canada charge to each other!

I got the idea to buy Chinese banks when the Evergrande crisis pushed their prices down. Evergrande’s bonds went into default last year; some thought that Chinese banks would go under because of the crisis. The sheer amount of Evergrande’s bonds is pretty large ($300 billion) but it’s spread out across the whole world. In addition to Chinese banks, these bonds are held by Western asset managers, foreign banks, and others. So, I figured that the risks to Chinese banks were overstated. My suspicions were confirmed when I saw that Li Lu was holding Postal Savings Bank of China ( PSTVY ). Li Lu is a value investor known for his market-beating track record, which has been estimated at between 16% and 30% CAGR .

Because of the property crisis, Chinese banks have been beaten down to rock bottom prices. For example, PSTVY trades at 5.15 times earnings and 0.51 times book value. It looks like a bargain, and other Chinese banks trade at similar multiples.

One thing you’ll want to note about CHIX is that its management fees are fairly high. The MER comes in at 0.65%, which is much higher than any of the other funds on this list. However, it also has a much higher dividend yield, so if you value income over capital preservation, it may make sense for you.

The Bottom Line

The bottom line about dividends is that you don’t need to take big risks to get them. Dividend ETFs often pay 5% or better yields, even some broad market funds yield near 3%. If you’re willing to look into sector funds in foreign countries, you can get up to 6%. For me personally, a mix of income and overall value is the best portfolio combination, because it maximizes total returns. So, I’m comfortable holding all three of the funds mentioned in this article long term.

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