Investors tend to forget the importance of dividends in roaring bull markets. But with the bull market now a memory, dividends have certainly regained their appeal.

In the long run, dividends provide a large portion of the total return on equities — 30% in the Canadian market since 1956, according to Toronto Stock Exchangedata.

There are, however, several things to consider when seeking dividend income, such as safety of payout, yield and the prospect of dividend increases. So, in a timely move, Standard & Poor’s Corp. and the TSX have produced a new S&P/TSX Canadian dividend aristocrats subindex featuring stocks on which the dividend has increased every year for the past seven years.

(In the U.S., there are many stocks that have increased their dividends for 10, 20, 30 or even more years. The fact the index-makers had to settle on seven years for the new subindex says a lot about the limitations of the Canadian investment market.)

An increased dividend payment every year does confer a measure of safety on a dividend being maintained. Boards of directors are reluctant to commit themselves to shelling out more cash if they suspect there is any chance they might soon have to change their minds.

The dividend aristocrats subindex began operating in August, although it has been back-tested to 2001. Since that year, the subindex would have risen by about 2.5 times, while the S&P/TSX composite index has doubled.

“Constituents [of the new subindex] have more sustainable payout ratios and have shown better returns on equity and higher earnings and dividend growth than the Canadian market overall,” the TSX release says. “[The subindex] also has consistently delivered yields in the 3.1%-4.2% range over the past five years.”

The new subindex started with 37 stocks and income trust units (see accompanying table), with an index level ranging between 170 and 180 in August and September. Since the subindex’s initiation in August, it has dropped by 6.5%, vs a 9.1% drop by the S&P/TSX composite index. The subindex’s yield as of Sept. 19, the latest revision, is 5.3%, thanks to the market’s September drop.

Index weighting is by dividend yield. The top 10 stocks and trust units account for half the subindex’s weighting. The top-weighted component as of the Sept. 19 rebalancing is Energy Savings Income Fund, at the maximum weighting of 8% of the subindex. Following Energy Savings in weighting are CI Financial Income Fund, AltaGas Income Trust, H&R Real Estate Investment Trust, RioCan Real Estate Investment Trust, First Capital Realty, National Bank of Canada, Bank of Montreal, Royal Bank of Canada and IGM Financial Inc.

The subindex is rebalanced quarterly. As of Sept. 26, CI had the top yield, which may well change its weighting in the next rebalancing.

For managing income-oriented portfolios, the subindex is a handy reference. Its companies are clearly a top-quality and consistent group. Yields, though, vary widely. The top-yielding common stock is BMO’s, at 6.1% as of Sept. 26, with First Capital Realty a decimal point behind. This is, of course, below the income trust yields in the subindex.

For income investors, stocks such as SNC-Lavalin Group Inc., Canadian National Railway Co., Ensign Energy Services Inc. and Métro Inc. may have less appeal. All have current yields of less than 2% despite annual increases. Their growth prospects may not be strong enough enticement for dividend-hungry portfolios.

The new subindex is ripe for attracting an exchange-traded fund. Since June 2007, S&P and the TSX have produced a preferred share subindex, which has attracted an ETF run by Claymore Investments Inc. The preferred subindex currently yields 5.4%.

The new Canadian subindex is similar in nature to the S&P 500 dividend aristocrats subindex, which contains stocks in the S&P 500 that have paid higher dividends annually for at least 25 years. But in the U.S. subindex, constituent stocks are equally weighted. IE