Top Canadian Dividend ETFs – Why we don’t own them

Recently a reader asked if I could write an article on how I feel about dividend ETFs. As of today our dividend portfolio consists of 72 individual dividend stocks and 2 index ETFs. While we deploy a hybrid strategy by investing in both dividend stocks and index ETFs, you may have noticed that we don’t own any dividend ETFs. We only hold broad market index ETFs.

Isn’t it better to hold dividend ETFs for far better diversification than hold individual dividend stocks?

Isn’t it easier to simply hold dividend ETFs than spend time on researching and purchasing individual dividend stocks?

Before we dive into these questions. Let’s take a look at some of the top Canadian dividend ETFs available as of 2017.

Top Canadian Dividend ETFs

VDY – Vanguad CAnadian High Dividend Yield Index ETF

Seeks to track the FTSE Canada High Dividend Yield Index. The fund invests primarily in common stocks of Canadian companies that pay dividends.

  • 0.22% MER
  • 3.22% yield
  • Monthly distribution
  • 63 holdings
  • Top 10 Holdings: Royal Bank (RY.TO), TD (TD.TO), Enbridge (ENB.TO), Bank of Nova Scotia (BNS.TO), Bank of Montreal (BMO.TO), TransCanada Corp (TRP.TO), Manulife Financial (MFC.TO), Canadian Imperial Bank of Commerce (CM.TO), Sun Life Financial (SLF.TO), Rogers Communications (RCI.B).
  • 61.6% Financials, 19.8% Oil & Gas, 6.5% Utilities, 5.1% Telecommunications, 4.3% Consumer Services, 2.2% Basic materials, 0.4% Industrial, 0.1% Consumer Goods.

ZDV – BMO Canadian Dividend ETF

Designed to provide exposure to a yield weighted portfolio of Canadian dividend paying stocks. The Fund utilizes a rules based methodology that considers the three year dividend growth rate, yield, and payout ratio to invest in Canadian equities.

  • 0.39% MER
  • 4.42% yield
  • Monthly distribution
  • 51 holdings
  • Top 10 Holdings: Veresen Inc (VSN.TO), Capital Power Corp (CPX.TO), IGM Financial (IGM.TO), Telus (T.TO), Gibson Energy (GEI.TO), National Bank of Canada (NA.TO), Pembina Pipeline (PPL,TO), CI Financial Corp (CIX.TO), Thomson Reuters (TRI.TO), Inter Pipeline (IPL,TO)
  • 33.62% Financials, 23.2% Energy, 15.48% Utilities, 8.75% Consumer Discretionary, 7.28% Telecommunication, 5.44% Industrial, 3.77% Real Estate, 2.18% Materials

XDV – iShares Canadian Select Dividend Index ETF

Seeks to provide long-term capital growth by replicating the performance of the Dow Jones Canada Select Dividend Index, net of expenses. Diversified exposure to 30 of the highest yielding Canadian companies in the Dow Jones Canada Total Market Index

  • 0.55% MER
  • 3.82% yield
  • Monthly distribution
  • 29 holdings
  • Top 10 Holdings: Agrium (AGU.TO), Canadian Imperial Bank of Commerce (CM.TO), Royal Bank (RY.TO), BCE (BCE.TO), Bank of Nova Scotia (BNS.TO), TransCanada Corp (TRP.TO), Emera (EMA.TO), IGM Financial (IGM.TO), Laurentian Bank of Canada (LB.TO)
  • 56.53% Financials, 12.83% Telecommunications, 9.69% Materials, 6.63% Utilities, 5.81% Energy, 4.3% Consumer Discretionary, 2.52% Industrials, 1.53% Real Estate, 0.16% Cash and/or Derivatives

XEI – iShares Core S&P/TSX Composite High Dividend Index ETF

Seeks long-term capital growth by replicating the performance of the S&P/TSX Composite High Dividend Index, net of expenses.

  • 0.22% MER
  • 4.38% yield
  • Monthly distribution
  • 75 holdings
  • Top 10 Holdings: Telus (T.TO), BCE (BCE.TO), TransCanada Corp (TRP.TO), Pembina Pipeline (PPL.TO), Bank of Nova Scotia (BNS.TO), Royal Bank (RY.TO), Enbridge (ENB.TO), Bank of Montreal (BMO.TO), Canadian Imperial Bank of Commerce (CM.TO), Shaw Communications (SJR.B)
  • 30.01% Energy, 27.75% Financials, 14.12% Real Estate, 10.75% Telecommunications, 9.06% Utilities, 4.26% Consumer Discretionary, 1.19% Materials, 1.03% Health Care, 0.94% Industrials, 0.41% Consumer Staples, 0.2% IT, 0.28% Cash and/or Derivatives

CDZ – iShares S&P/TSX Canadian Dividend Aristocrats Index ETF

Seeks to replicate the S&P/TSX Canadian Dividend Aristocrats Index, less fees and expenses. Diversified exposure to a portfolio of high quality Canadian dividend paying companies.

  • 0.66% MER
  • 3.95% yield
  • Monthly distribution
  • 88 holdings
  • Top 10 Holdings: Corus Entertainment (CJR.B), Northview Apartment REIT (NVU.UN), Granite REIT (GRT.UN), Gibson Energy (GE.TO), Algonquin Power (AQN.TO), Alaris Royalty Corp (AD.TO), IGM Financial (IGM.TO), Altagas (ALA.TO), Russel Metals (RUS.TO), Enercare Inc (ECI.TO)
  • 21.35% Financials, 18.78% Energy, 12.59% Real Estate, 11.98% Consumer Discretionary, 11.05% Industrials, 7.49% Utilities, 5.89% Consumer Staples, 4.76% Telecommunications, 4.09% Materials, 1.73% IT, 0.29% Cash and/or Derivatives

XIU – iShares S&P/TSX 60 Index ETF

Seeks long-term capital growth by replicating the performance of the S&P/TSX 60 Index, net of expenses. Exposure to large, established Canadian companies.

  • 0.18% MER
  • 2.76% yield
  • Quarterly distribution
  • 61 holdings
  • Top 10 Holdings: Royal Bank (RY.TO), TD (TD.TO), Bank of Nova Scotia (BNS.TO), Enbrige (ENB.TO), Canadian National Railway (CNR.TO), Suncor Energy (SU.TO), Bank of Montreal (BMO.TO), BCE (BCE.TO), TransCanada Corp (TRP.TO), Manulife Financial (MFC.TO)
  • 39.32% Financials, 21.56% Energy, 9.94% Materials, 7.92% Industrials, 6.71% Telecommunications, 5.48% Consumer Discretionary, 4.35% Consumer Staples, 2.47% IT, 1.83% Utilities, 0.32% Health Care, 0.10% Cash and/or Derivatives

DXM – First Asset Morningstar Canada Dividend Target 30 Index ETF

This ETF offers investors a way to gain exposure to the most fundamentally sound dividend paying stocks in Canada by replicating, to the extent possible, the Morningstar Canada Target Dividend Index.

  • 0.60% MER
  • 3.99% yield
  • Quarterly distribution
  • 30 holdings
  • Top 10 Holdings: Veresen (VSN.TO), Rogers Communications (RCI.B), BCE (BCE.TO), Telus (T.TO), Algonquin Power (AQN.TO), Shaw Communications (SJR.B), WSP Global (WSP.TO), Fortis (FTS.TO), Hydro One (H.TO), Emera (EMA.TO)
  • 26.6% Energy, 25.4% Financials, 17.1% Utilities, 14.2% Telecommunication, 6.74% Real Estate, 3.47% Industrials, 3.24% Consumer Discretionary, 3.24% Materials

PDC – PowerShares Canadian Dividend Index ETF

PDC seeks to replicate, to the extent reasonably possible and before fees and expenses, the performance of the NASDAQ Select Canadian Dividend Index, or any successor thereto. This PowerShares ETF invests primarily in Canadian equity securities.

  • 0.55% MER
  • 5.04% yield
  • Monthly distribution
  • 45 holdings
  • Top 10 Holdings: Telus (T.TO), BCE (BCE.TO), Power Financial (PWF.TO), Canadian Imperial Bank of Commerce (CM.TO), Pembina Pipeline (PPL.TO), Brookfield Infrastructure (BIP.U), Shaw Communications (SJR.B), Power Corp (POW.TO), Emera (EMA.TO), Inter Pipeline (IPL.TO)
  • 27.02% Financials, 18.18% Energy, 15.49% Utilities, 17.05 Telecommunication, 15.49% Utilities, 13.8% Real Estate, 5.27 Consumer Discretionary, 1.7% Materials, 0.93% Industrials, 0.56% Consumer staples

Table below summarizes the key parameters for all of these top Canadian Dividend ETFs with the TSX Composite Index as a comparison.

 VDYZDVXDVXEICDZXIUDXMPDCS&P/TSX Composite Index
MER0.22%0.39%0.55%0.22%0.66%0.18%0.60%0.50%-
Yield3.22%4.42%3.82%4.38%3.95%2.76%3.99%5.04%1.28%
Holdings6351297588613045250
DistributionMonthlyMonthlyMonthlyMonthlyMonthlyQuarterlyMonthlyMonthly-
Financials61.60%33.62%56.53%27.75%21.35%39.32%25.40%27.02%33.30%
Energy19.80%23.20%5.81%30.01%18.78%21.56%26.60%18.18%20.70%
Utilities6.5%15.48%6.63%9.06%7.49%1.83%17.10%15.49%3.30%
Telecom & IT5.1%7.28%12.83%10.95%6.49%9.18%14.20%17.05%8.20%
Consumers4.40%8.75%4.30%4.67%17.87%9.83%3.24%5.83%9.40%
Materials2.20%2.18%9.69%1.19%4.09%9.94%3.24%1.70%11.90%
Industrials0.40%5.44%2.52%0.94%11.05%7.92%3.47%0.93%9.60%
Real Estate0%3.77%1.53%14.12%12.59%0%6.74%13.80%3.0%
Health Care0%0%0%1.03%0%0.32%0%0%0.60%
Cash0%0.28%0.16%0.28%0.29%0.10%0.01%0%0%

 

Some thoughts on Dividend ETFs

  • All of the listed Canadian dividend ETFs have different stock selection criteria, hence they hold a different number of stocks with slightly different top 10 holdings.
  • VDY and XIU have similar top 10 holdings. However VDY’s top 10 holdings make up 70% of the entire fund assets. On the other hand, XIU’s top 10 holdings make up about 50% of the entire fund assets. VDY’s performance will be closely tied to the top 10 holdings.
  • XDV, CDZ, and DXM have relatively high MER compared to the rest of the dividend ETFs.
  • CDZ’s top 10 holdings have some questionable stocks. A number of dividend stocks have unsustainable payout ratios. It is very possible these companies may cut or suspend their dividends in the near future.
  • XIU tracks closely to the TSX Composite Index sector weighting. This is expected since XIU tracks the S&P/TSX 60 Index.

Which dividend ETFs would I purchase?

If I were to purchase one of these top Canadian dividend ETFs, which one would I purchase?

That’s a tough question to answer. After evaluating different parameters I would purchase between XEI or XIU based on the following reasons.

  • Low MER for both XEI and XIU
  • XEI has one of the highest yields and holds 75 securities. Although the top 10 holdings are dominated by banks, energy, pipeline, and telecommunications and takes up over 45% of the fund assets, holding 75 securities does provide quite a bit of diversification. If your goal is yield, then XEI might be a good choice.
  •  XIU has the lowest MER with the lowest yield of all 7 top Canadian dividend ETFs. It does track closely with the TSX composite index. I believe, if you want an ETF that tracks the Canadian market while focuses on dividend income, XIU might be one of the best Canadian dividend ETFs to hold in your portfolio. 

 

Why don’t we own any of the top Canadian dividend ETFs?

Dividend ETFs offer many benefits. Isn’t it easier to just purchase dividend ETFs instead of purchasing individual dividend stocks? Why don’t we own any of the top Canadian dividend ETFs that I just mentioned above?

  • All of the dividend ETFs have different selection criteria. This results in very different dividend stock selections. Take VDY for example, if we own only one dividend ETF, do we really want to hold 14% of our portfolio in Royal Bank? Similarly, I have no desire owning the likes of Veresen, Altagas, and Russel Metals so I wouldn’t want to hold ETFs with these stocks as the top 10 holdings.
  • What if I want to have a heavier exposure to consumer staples or other sectors than the dividend ETF has selected? Only CDZ has a high exposure to consumer staples, but I would be paying a much higher MER. It would be easier to simply purchase individual dividend stocks and control my portfolio’s sector weighting myself.
  • With dividend ETFs, it is difficult to estimate the monthly distribution amount. I like to be able to estimate how much dividend income I will receive.
  • I need to pay management fees while holding ETFs. This is much different than owning individual dividend stocks. With individual dividend stocks, I am only paying for the initial commission fees when I make purchases. Say I have a portfolio of $500,000 and I make 50 purchases. With Questrade, each trade costs $4.95, so 50 trades would cost me $247.50 to set up the portfolio. Once the portfolio is set up, I would not touch it. Say I purchase XIU with the $500,000. Although Questrade offers free ETF purchases, each year I would be paying 0.22% of management fee, or $1,100. This is a significant amount of fee to pay for owning a dividend ETF.
  • Finally, with a portfolio consists of mostly individual dividend stocks, I have control over on whether I want to sell or buy stocks. With a dividend ETF, if a stock falls off the selection criteria, the stock would not be part of the ETF. I have absolutely no say on whether to continue to hold the stock or not. Essentially by owning individual dividend stocks, I am in control of my own portfolio. I get to decide which stock to own and its weighting in my portfolio. I also get to decide whether I would enroll in DRIP or not. Many Canadian dividend paying companies provide a discount for DRIPing shares, so I would be take to take advantage of cost saving (Note: if you’re DRIPing through a discount broker via synthetic DRIP, check the policy. Not every discount broker will honor the DRIPing discount).

 

Final thoughts

Dividend ETFs offer better diversification and still provide solid income distribution. But not all dividend ETFs are created equal. If you decide to own dividend ETFs, definitely do your homework. For Mrs. T and I, we believe owning individual dividend stocks is a better approach than owning dividend ETFs. Owning individual dividend stocks allow us to have more control over our portfolio and save money in the long run.

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26 Comments

  • Reply
    Dividend Growth Investor
    June 8, 2017 at 8:35 am

    You are just trying to beat the market. 😉

    That’s the response I get when I talk about why I don’t own dividend ETFs, but prefer to hold the stocks directly.

    • Reply
      Tawcan
      June 10, 2017 at 7:25 pm

      Haha I prefer to hold the stocks directly as well. 🙂

  • Reply
    Tim Kim @ Tub of Cash
    June 8, 2017 at 10:21 am

    Hmm, allow me to go on a bit of a tangent. I don’t focus on dividend stocks and I’ll attempt to explain why. It’s actually one of the biggest fallacies I come across, so maybe I’ll do a post on it later myself. It’s because people, especially in the FIRE community, treat dividends like a free lunch. But it’s all just mental accounting. Trust me I get the thought process. Because I struggle with it myself. It’s hard not to think of things from a cash-flow perspective. But the fact is: selling an equal amount of stock is equivalent to getting a cash dividend. The former is actually preferable from a tax standpoint, and it’s just strictly math. According to Mr. Swedroe (he’s fairly well known in the investment community), “Whether you take the cash dividend or sell the equivalent dollar amount of the company’s stock, at the end of the day, you will have the same amount invested in the stock. It’s just that with the dividend, you own more shares but at a lower price (by the amount of the dividend), while with the self-dividend, you own fewer shares but at a higher price (because no dividend was paid)…dividends mechanically reduce the price of the stock.”

    • Reply
      Bernie
      June 8, 2017 at 11:56 am

      “Whether you take the cash dividend or sell the equivalent dollar amount of the company’s stock, at the end of the day, you will have the same amount invested in the stock.”

      The major difference is in the future. Those selling their stock for income will have a declining share count with a possibility of running out of stock at some future point in time. Those solely taking the cash dividend will not only maintain the same share count but those shares will also provide them with an increasing cash dividend through dividend growth.

    • Reply
      Tawcan
      June 10, 2017 at 7:28 pm

      You can use the same argument for index ETFs though, since you get dividend income/distribution with index ETFs.

      I think Bernie explained it well, the difference is in the future. Many of dividend investors don’t plan to sell their stocks in the future, so as indexers start to sell their stocks while DGIs hold theirs and just use dividend income, the difference begins to compound itself.

  • Reply
    Bernie
    June 8, 2017 at 10:31 am

    I’m a retired DGI. I simply don’t buy dividend ETFs because my focus is on reliable dividend income with dividend growth providing inflation protection. ETFs don’t focus on dividend growth. Their distributions are irregular and unpredictable plus the yield is reduced by the MER. They’re better suited for the younger investor. I prefer to craft my own homemade ETF portfolio of close to 3 dozen diversified dividend growth stocks. Its cheaper to run and income is more predictable.

    • Reply
      Tawcan
      June 10, 2017 at 7:29 pm

      Very good point about dividend growth. Many ETFs don’t focus on dividend growth so you won’t benefit as much from investing in dividend stocks.

  • Reply
    Ms. Frugal Asian Finance
    June 8, 2017 at 10:46 am

    Wow this post is so advanced. I honestly had ever heard of Dividends ETEs before. But I think it’s really helpful to those who are interested. Thanks for sharing!

    • Reply
      Tawcan
      June 10, 2017 at 7:29 pm

      Dividend ETFs are just a subset of index ETFs, just dividend ETFs are more specific when it comes to selection criteria.

  • Reply
    12-Minute Fellow
    June 8, 2017 at 11:03 am

    Hi Tawcan,

    Really like your blog and your investing style.

    I also prefer to own individual dividend stocks for reasons similar to yours. Indexing sure gets you diversified but by default, gets you a couple bad apples that you possibly would pass on.

    Still think indexing is a good compromise and would suggest it as a great first step to start your DIY career. Rookie DIY investors can use indexing to get acquainted with the account setup and all. It also requires less money to start off. After a while, the next step towards individual stocks investing will be much easier for them.

    Looking forward to reading your wonderful ideas, keep them coming!

    JD

    P.S.: I’m proud of my success DIY investing but I have to admit I’m a little envious of your great success as a blogger. Some pointers sure would help me improve…

    • Reply
      Tawcan
      June 10, 2017 at 7:30 pm

      Hi JD,

      Thank you! Index is a good compromise and for someone starting out as a DIY investor, I think index is a great way to get started. Dividend investing is a good compliment with index ETFs.

      When it comes to blogging, focus on telling your story and building your own voice.

  • Reply
    John R
    June 8, 2017 at 2:36 pm

    Disclaimer: the following is my personal opinion and should not be taken as advice.

    Bob, maybe you & some of your posters are right when it comes to self investing in stocks [building your own portfolio’s] rather than trusting a fund manager, it’s all a personal choice, some folks have the financial planner doing it & are OK with that.

    As with any equity/stock market investing there are not too many guarantees, timing is everything as is protecting any downside to try to always get a decent return that is higher than a bank term deposit

    On ETF’s I take a different approach. If I were to invest in pure ETF’s they’d have to be ones that pay a dividend as well as being optionable. I wouldn’t muck around with the so called mickey mouse FET funds (with or without dividends) that swing all over the place or end up buying into the 10 largest ETF’s on the US big boards.

    My choice of ETF would be one of the top 10 beginning with one or two of the following

    I would hedge it & leverage to get me downside protection as well as dividends + option money to yield as close as possible to 10%. Aggressive, well yes – doable yes, but I settle for 5% – 6% or as close to a 10% annual return. That is me.

    http://www.etf.com/SPY

    https://finance.yahoo.com/quote/SPY/options?p=SPY&date=1529020800

    http://www.etf.com/QQQ

    https://finance.yahoo.com/quote/QQQ/options?p=QQQ&date=1521158400

    • Reply
      Tawcan
      June 10, 2017 at 7:32 pm

      Hi John,

      When it comes to optional ETFs, that’s a bit beyond many people’s knowledge. It’s a good way to get additional returns that’s for sure.

  • Reply
    Vito
    June 8, 2017 at 8:34 pm

    Hey Tawcan,

    I know your broker is Questrade and you’ve mentioned that they provide synthetic DRIPs, but do you know if Questrade offers discounting DRIPs?

    Thanks!

    • Reply
      Tawcan
      June 10, 2017 at 7:32 pm

      Hi Vito,

      Questrade does not offer discounting DRIPs, TD Waterhouse does.

      • Reply
        Vito
        June 11, 2017 at 4:51 am

        That’s too bad, but I’m just curious, how much of a discount do investors get? Is it significant to the point where it may merit switching brokerages?

        • Reply
          Tawcan
          June 11, 2017 at 4:41 pm

          It depends on the company, some offer up to 10%, some offer 5%. You need to check on each company’s website.

  • Reply
    Amber tree
    June 8, 2017 at 11:11 pm

    With your main goal of growing DGI income, individual stock make more sense. Especially since you have the knowledge, time and willpower to do the follow up.

    It is personal finance, so each person has to make its own analysis.

    • Reply
      Tawcan
      June 10, 2017 at 7:33 pm

      Exactly! Some people do index ETFs, some people do DGI, some people do a bit of both, some tab into option trading. It’s your personal preference.

  • Reply
    Mr. Tako
    June 10, 2017 at 3:37 am

    Great post Tawcan! I completely agree with your reasoning to not hold those ETF’s. It mirrors some of my own reasons for avoiding many ETFs.

    Why would I want to hold obvious garbage just because it’s in an ETF? I wouldn’t of course!

    • Reply
      Tawcan
      June 10, 2017 at 7:34 pm

      Exactly! Why would you want to hold garbage when you can use that money to hold something better? Although when it comes to garbage, that makes good investment too (i.e. Waste Management).

  • Reply
    John R
    June 10, 2017 at 5:02 am

    on dividend paying ETF’s as well as dividend stocks it’s a personal choice as is it ‘how sophisticated an investor you are’. There some very good dividend paying ETF’s with low EMR’s out there. For those folks that have 10, 25, 50 even a 100 individual stocks in their holding portfolio, it’s like having your own bag of ETF’s, some go up, some go down, some paying different dividend percentages. I don’t have any ETF’s, although I will admit to having bought & sold as a swing trader of ETF’s in the past. Would I buy ETF’s today – well yes, but they’d have to meet my personal investing criteria of ‘minimum 5% dividend, low volatility and have options on them. I have traded 2x & 3x ETF’s as well as their corresponding inverse ETF’s.

  • Reply
    John R
    June 10, 2017 at 5:12 am

    A US big board ETF’s might do the job for those that have US stocks in their portfolio. I posted two above & forgot to include for information purposes only

    http://www.etf.com/DIA?nopaging=1

    https://finance.yahoo.com/quote/DIA?p=DIA

  • Reply
    Sascha
    June 17, 2017 at 9:54 pm

    the only ETF I hold is XAW ex Canada. That way I cover everything else with one low cost.

    • Reply
      Vito
      June 18, 2017 at 5:14 pm

      Same. XAW & VCN & VSB here 🙂

  • Reply
    cannew
    June 18, 2017 at 7:51 am

    Most people only look at ETF’s in the short term. Tale a look a a 10 yr chart and I believe you will find:
    1. that most have little or no price growth over the period (US one may be the exception)
    2. that the distributions go up and down over time
    3. that the distributions have little growth over the long term
    With regards to diversification:
    1. yes one owns all, most or many stocks
    2. those include the good, bad and ugly
    3. yes they include the DG stocks but some pay no dividend, cut their dividend or have not increased the dividend
    4. so one is paying the fee (regardless how small) to own many stocks one might want to own
    I’m glad I don’t own any, but its a personal choice.

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