Stocks or ETFs? What’s the best long-term choice for a dividend investor?

Which is likely to produce a better return over time: owning ETFs or individual stocks?

This question was posed last week by a 50-year-old reader who described himself as a “medium risk” investor.

He’s operating with a 10-year time horizon and wants to focus on both price appreciation and dividends.

“Is it better to hold individual stocks like Scotiabank, Rogers, Quebecor, etc., or to hold a dividend fund like HAL,” he asked.

He also wants to know if there are sectors that offer better deals right now – he mentions banks, healthcare, energy, and tech.

There’s no simple answer to these questions and predicting precisely what will happen over the next 10 years is impossible. But financial advisors always advise people to take a long-term view. Our reader is trying to do just that.

Horizons Active Canadian Dividend ETF

So, let’s see what guidance we can provide. We’ll start with the ETF he mentions, the Horizons Active Canadian Dividend ETF (HAL-T ). It uses active management to select dividend-paying stocks. Top holdings include Royal Bank of Canada, Toronto-Dominion Bank, Ovintiv Inc., Telus Corp. and FreeholdRoyalties Ltd.. The fund has a ten-year average annual compound rate of return of 8.61 per cent, as of Sept. 30. That’s a good benchmark with which to work.

iShares S&P/TSX Composite High Dividend Index ETF

Competitor BlackRock, which manages the iShares ETFs, has several passively managed funds that focus on dividend-paying stocks. The best of them, the iShares S&P/TSX Composite High Dividend Index ETF (XEI-T ) shows a 10-year average annual compound rate of return of 6.89 per cent.

BMO Canadian Dividend ETF

That’s in line with other passively managed dividend ETFs, like the BMO Canadian Dividend ETF (ZDV-T ), which has averaged 6.4 per cent over the past decade.

None of those returns are overly impressive at first glance. That may be because we became complacent about rising stock prices during the great Bull Market of 2009-2020 and again during the COVID Bull of late March 2020 to early April 2022, where tech stocks and stay-at-home companies were dominant.

But here are some surprising numbers. According to the S&P/Dow Jones Indices, the average annual return for the S&P/TSX Composite over the 10 years to Oct. 14 was only 4.15 per cent. The Composite Dividend Index was slightly better at 4.66 per cent while the S&P/TSX Composite High Dividend Index averaged a meagre 1.97 per cent.

All the dividend ETFs I looked at outperformed the indexes.

Of course, returns on an equity portfolio will depend entirely on which stocks are chosen. I expect that many readers’ portfolios outperformed the numbers I’ve cited over the past decade. My Internet Wealth Builder Growth Portfolio generated an average annual return of 22.6 per cent over the 10 years to Aug. 25, but it carries a higher degree of risk than a dividend fund.

To return to our reader’s question about whether to choose ETFs or individual stocks, the numbers suggest that, unless he is a great stock picker, he’ll likely fare better over the next decade with an ETF. HAL is a good choice.

As for which sectors offer the best deals, historically they’re those that are most beaten down right now. That would include technology, financials, and real estate (REITs). Energy stocks, by contrast, appear to be fully priced or in some cases overvalued. The S&P/TSX Capped Energy Index is ahead almost 45 per cent year-to-date. There’s not much upside there.

Photo by Austin Distel on Unsplash