Author Topic: Dividend Yield of VUN vs VTI?  (Read 4313 times)

Heckler

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Dividend Yield of VUN vs VTI?
« on: July 05, 2015, 09:19:50 AM »
I'm holding VUN (Vanguard Canada's Total US market that I believe holds VTI, but reports in $CAD).

Looking at only dividend yields, I'm surprised that the VUN Dividends are 1.2% lower than VCN (Total CAD market), and even 2.3% lower than VAB aggregate Bond fund.


Dividend Yield, as reported by my BMO Investorline.

VUN 1.5%
VCN 2.7%
VAB 2.8%  (I realize this is irrelevant)

I know about 15% US tax on dividends for VUN in an RRSP.  But I didn't think that US dividends would be this much less than Canadian ones.  Is it due to taxes I should try to avoid, or are US dividends lower than Canadian ones?

How much is it worth my while to figure out Norbits Gambit and buy VTI instead with my next $12k instalment to either VUN or VTI?

I'm looking for an apples to apples comparison of these two.  I suspect the total return measured in $CAD is very dependant on exchange rates. Thanks!
« Last Edit: July 05, 2015, 09:22:20 AM by Heckler »

Heckler

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Re: Dividend Yield of VUN vs VTI?
« Reply #1 on: July 05, 2015, 09:29:19 AM »
http://canadiancouchpotato.com/2013/08/16/inside-the-new-vanguard-etfs/

This is the article that made me decide on VUN with my initial $60k buy in to the couch potato.  With $10k, I believe VUN is still the right choice, but in 6 months our mortgage payments will be getting diverted to the fund I select this month, so it will start growing quickly. 

Cathy

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Re: Dividend Yield of VUN vs VTI?
« Reply #2 on: July 05, 2015, 10:33:16 AM »
First, the dividend yield does not matter and should not be something you look at in selecting your investments. Look at skyrefuge's posting history for more information on that topic. You'll want to master that level of understanding before continuing on investing, even though it's not that relevant to the rest of my post. Any exceptions to that principle are not relevant here.

Second, I have no idea why you are comparing the dividend yield of VUN to various unrelated funds. The only comparison that would make any sense is to compare VUN to its US version, VTI, and find out if there is any difference between the dividends, such that it would require an explanation.

Third, the dividend yield is not an ideal way to make an ultra-fine-grained comparison between the dividends of two funds because dividend yield is not an intrinsic property of the fund. The fund's Board declares an amount of dividend, not a percentage, and they are declared prospectively, not retroactively. This means there is no obvious way to calculate a dividend yield. Different websites use different approaches, especially when you are comparing a US fund (VTI) to a Canadian fund (VUN), because the calculation conventions may differ between countries.

Fourth, under US law tax, dividends distributed by VUN are not subject to the nonresident alien tax authorised by 26 USC 871 if you and VUN are both residents of Canada and you are not a citizen of the US and not engaged in a trade or business in the US, because the nonresident alien tax in that case only applies to "amount[s] received from sources within the United States" and your VUN dividend is received from Canada.

Although you don't pay any tax to the US when you hold VUN (assuming you are a resident of Canada and not a citizen of the US and not engaged in a US trade or business), VUN itself pays taxes to the US when it receives US-source dividends because in that case, VUN is the nonresident alien receiving US-source income and paying taxes on it pursuant 26 USC 871(a)(1)(A). Note that although that provision prescribes a rate of 30%, it is lowered to 15% in this case by the combined effect of 26 USC 894 ("Income affected by treaty") and Article X of the US-Canada Income Tax Convention.

If you don't pay any tax to the US when you hold VUN, why can you take a foreign tax deduction in respect of tax you did not pay? The answer is that the Income Tax Act, RSC 1985, c 1 (5th Supp), and in particular ss 104(22) and 104(22.1) thereof, contains special rules that allows you to take a foreign tax deduction for taxes paid by a trust in which you have an interest. I won't summarise those rules here because they aren't germane to this post.

Back to the main point, dividend amounts reported by VUN are going to be net of any expenses that VUN pays. For example, imagine the logistics of declaring and paying a dividend cost a company $1,000,000. If that is going to be paid out of the dividend, you would certainly expect that to already be figured into the declared dividend amount, not just mysteriously proportionally missing from the money you receive. The same applies here. The reported dividend of VUN is net of expenses that VUN itself pays, including any US tax that it pays.

Let's look at the above numerically. For the reasons given above, we'll make sure we retrieve the dividend yield for both funds from the same website. According to TD Waterhouse (as of right now), the dividend yield of VUN is 1.53% and the dividend yield of VTI is 1.86%. The expression 1.86% * 0.85% equals 1.581% which is not exactly the same as the VUN yield, but it's close. The relatively small difference could be a result of (1) rounding error in the figures reported or calculated by TD Waterhouse, (2) the concept of dividend yield being misleading (discussed above), (3) the two funds having different expense ratios, or (4) a variety of other things. Keeping in mind that dividend yield does not matter, you don't really need to worry about it; but as we've shown, they are pretty close anyway.

Heckler

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Re: Dividend Yield of VUN vs VTI?
« Reply #3 on: July 05, 2015, 10:45:46 AM »
Wow, thanks for the thorough reply Cathy, to what I realize now bordered on being a dumb question.  Your last paragraph really answers what I was looking for.

I will continue investing, even though I am still learning this level of financial jedi skills.  Two years ago I didnt know the difference between stocks and bonds, but still have 15 years of savings and I was able to redeploy those troops in a low cost globally diversified portfolio.
« Last Edit: July 05, 2015, 10:48:35 AM by Heckler »

okits

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Re: Dividend Yield of VUN vs VTI?
« Reply #4 on: July 05, 2015, 04:22:10 PM »
Cathy explained the difference between VUN and VTI.  My thoughts are that I'm holding VUN and ZCN (substitute VCN) for the future capital gains.  Any dividends are nice but not the primary concern.  Even VAB's yield is secondary to the diversification it provides your portfolio.  Dividend focus is mainly for my preferred share ETFs.

a1smith

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Re: Dividend Yield of VUN vs VTI?
« Reply #5 on: July 05, 2015, 06:48:28 PM »
 Expense ratio for VTI is 0.05% and for VUN it is 0.16%.  So, as Cathy mentioned, this is another factor but it still doesn't get you from 1.58% to 1.53%.  So, other items she mentioned are in play also.