Excluding Energy Stocks: The Impact on Canadian Dividend Yield
Generating dividends from stocks is an important source of income for many investors. However, many investors also avoid investing in stocks that don’t align with their environmental, social, and governance (“ESG”) values. This means, many investors exclude oil & gas stocks from their portfolio. So, how does this affect Canadian dividend yield?
For Canadian investors, energy stocks make up 17% of the benchmark S&P/TSX 60 Index and contribute 26% of the dividend yield. So by excluding energy stocks from their stock portfolio, Canadian investors are also sacrificing some income. But, how much?
This post will explain how much dividend income Canadian investors are giving up by excluding energy stocks from their portfolio.
What are Dividends?
Dividends are payments made by a company to its shareholders usually out of its profits or retained earnings. They are typically paid on a quarterly basis. Not all companies pay dividends. The amount of the dividend is usually expressed as a percentage of the company’s stock price, known as the dividend yield.
What is a Dividend Yield?
Dividend yield is a financial ratio that represents the annual dividend payment of a stock as a percentage of its current market price. It is calculated by dividing the annual dividend per share by the stock price per share.
For example, if a stock pays an annual dividend of $2 per share and its current market price is $50 per share, the dividend yield would be 4% ($2 / $50 x 100).
Dividend yield is a useful metric for investors who are looking for income from their investments, as it can help them compare the dividend-paying ability of different stocks.
What is an Index?
A stock market index is a measure of the performance of a group of stocks in a market. One such index is the S&P/TSX 60, which is a stock market index of the 60 largest companies listed on the Toronto Stock Exchange (TSX) in Canada.
The S&P/TSX 60 Index measures the 60 largest companies in Canada by market capitalization (size). The bigger the company, the greater its share of the index.
An index can also be used as a tool for creating diversified portfolios, as it includes companies from various sectors such as finance, energy, materials, and technology.
It’s important to note that stock market indexes are not directly investable, meaning that investors cannot buy or sell the index itself. Instead, investors can invest in index funds or exchange-traded funds (ETFs) that track the performance of the index, or they can invest in individual stocks of the companies that make up the index.
Current Index Weights and Associated Dividend Yields
To determine how much energy contributes to the yield of the S&P/TSX 60 and how much investors might be sacrificing when they exclude oil & gas stocks from their portfolio, we first need to determine the yield of each stock in the index, its relative weight of the index, and to which sector each stock belongs. Click this link for a site where this information can be readily obtained.
Once we determine the contribution that each sector makes to the dividend yield of the entire index, we need to re-construct the index without energy stocks to determine each sector’s associated weight.
Here is a table showing the weights of each business sector of the S&P/TSX 60 Index with and without energy:
| Sector Weight | Ex Energy Weight | |
| Communications | 5.40% | 6.54% |
| Consumer | 11.27% | 13.65% |
| Energy | 17.44% | |
| Financial | 26.80% | 32.46% |
| Industrials | 13.04% | 15.80% |
| Information | 10.31% | 12.49% |
| Materials | 10.89% | 13.19% |
| Real Estate | 0.39% | 0.48% |
| Utilities | 4.45% | 5.39% |
As the table shows, after excluding energy stocks from the S&P/TSX 60 Index, the financial sector changes from a weight of 27% to 32%.
Here is a table showing the dividend yields of each sector of the S&P/TSX 60 and how the yield of each sector contributes to the index’s overall yield:
| Sector Yield | Yield Contribution | |
| Communications | 4.80% | 8.31% |
| Consumer | 1.45% | 5.26% |
| Energy | 4.64% | 25.95% |
| Financial | 4.73% | 40.71% |
| Industrials | 1.22% | 5.12% |
| Information | 0.60% | 2.00% |
| Materials | 1.87% | 6.53% |
| Real Estate | 3.10% | 0.39% |
| Utilities | 4.01% | 5.74% |
We can see that the yield of the financial sector is 4.73%, whereas the yield of the energy sector is 4.64%.
We can also see how the financial sector makes up more than 40% of the total yield of the S&P/TSX 60, whereas the energy sector contributes almost 26% of the index’s entire yield.
Ex Energy Dividend Yield Results
Even though the dividend yield of the entire S&P/TSX 60 Index is 3.11%, if we exclude energy stocks from the index, the yield drops to 2.79%. This means investors who exclude oil & gas stock from their portfolio will give up some yield.
Essentially, by excluding oil & gas stocks from an investment portfolio, blue-chip Canadian investors are sacrificing 11% of their dividend income.
Not the End of the Story
Although its true how Canadian investors are giving up 11% of their dividend income by excluding oil & gas stocks from their portfolio. What does it matter? For many, no amount of money makes up for the harmful environmental consequences of oil & gas production.
Also, if income is important, what can investors do to tilt their yield closer to the average while still excluding oil & gas on moral grounds?
Keep in mind how the financial sector makes up a large part of the Canadian market. So to avoid greater concentration, investors avoiding oil & gas should increase the yield of their portfolio by tilting it towards other high yielding sectors.
Portfolio yields could be increased by adding exposure to the Communications sector (BCE, Telus), and by also considering more utilities and real estate in a Canadian portfolio.
Be Careful with Utilities
If investors who exclude oil & gas stocks are adding yield by tilting towards utility stocks, they should be mindful that many utilities also generate electricity from those sources. So, to remain true to environmental values, investors should focus on utilities that add yield while also generating supporting environmental sustainability.
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