How Manulife ETFs tap dividends and diversification to enhance returns

Against a backdrop of record inflation and failing banks, ETF director Robert Wernic is looking beyond traditional financial and energy stocks to generate value

How Manulife ETFs tap dividends and diversification to enhance returns

This article was produced in partnersip with Manulife Investment Management.

The steady income from dividend-paying stocks is a welcome alternative for investors shaken by rapid inflation and the sudden failure of some top institutions.

With record inflation outpacing the returns from fixed-income securities, we think investors are switching gears and turning to dividend-paying stocks that can provide a steady income and capital appreciation.

“What's been working in the last 10 years is no longer working and it's time to get back to the basics of building a suitable portfolio,” he said. Wernic suggests looking at ETFs that focus on high quality companies that generate positive cash flow, revenue and earnings that can pay out dividends and consistently grow those dividends over time.

Working closely with advisors in his role as Director of ETFs at Manulife Investment Management who oversees ETF distribution in Quebec. Wernic sees an emerging trend. After being overlooked during the mad dash for high-growth technology plays, today dividend stocks are becoming a centerpiece of investment strategies.

“Over the last 10 years, dividend payers were conservative and mostly occupied a satellite position in portfolios,” he noted. “But now – given the macro environment of inflation, higher rates, and the risk of recession – advisors are repositioning dividend payers as a core component of their portfolios.”

However, opting for dividends is just the start, says Robert Wernic. To maximize returns from dividend stocks, Wernic suggests using an active approach to find opportunities that are often missed by passive exchange-traded funds.

“One of the things we see in Canada are funds that are significantly overweight in financials and energy,” Wernic told Wealth Professional in a recent interview. “So, they have the five banks in the top 10 and everything looks exactly the same.”

Manulife Smart Dividend ETF has no banks in the top 10,” he said. “We go beyond the classic names that everybody owns. It’s what differentiates us from other Canadian dividend strategies out there.” Wernic suggests the need to see beyond the well-known names and focus on companies with the fundamentals to outpace the overall market.

“Look at any portfolio in the US and I'm willing to bet there are several very large, well-known as top holdings,” Wernic said. “They’re all familiar names but we really want to avoid doubling down on the same things that advisors were buying already. You need to look under the hood and make sure you're buying the right companies for the right price,” he says.

Seeking stability with dividends

Simply deciding to embrace a dividend strategy is not enough, however. To maximize returns from dividend stocks.

Wernic highlights the portfolio managers’ skill in actively managing the dividend-stock portfolio. By looking beyond the more common metrics, Wernic says an active manager can find the hidden gems and go in a different direction than the more passive managers.

“We differentiate ourselves from the passive indices and come up with a top 10 that looks completely different,” he said. “We have no banks in the top 10, but they don’t meet the combination of metrics required for CDIV.”

“Our top sector is still financials at 17.8%, but that's underweight relative to 32% in the index. Where we are overweight, for example, is in real estate.”

Wernic said the new normal of fear and uncertainty in the markets is forcing advisors to have some tough conversations with their clients.

"Our current environment is quite different than the last 5-10 years where growth names did really well and it seemed like everything just went up", he said. "But it does provide advisors an opportunity to look at, and rethink, the composition of equity portfolios."

The Manulife Smart Dividend ETF (CDIV) and the Manulife Smart U.S. Dividend ETF (UDIV, UDIV.B and UDIV.U) go further.


Sponsored by Manulife Investment Management, as of April 2023. 

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