Many readers have asked how I feel about dividend ETFs and what are the top Canadian dividend ETFs available in the market today. Mostly, is there a reason why we don’t utilize Canadian dividend ETFs to build our dividend portfolio?
While we deploy a hybrid strategy by investing in both dividend stocks and index ETFs, it’s a well-known fact that we don’t own any Canadian dividend ETFs. We only hold broad market index ETFs like XAW for geographical and asset diversification purposes.
Isn’t it better to hold dividend ETFs for far better diversification than hold individual dividend stocks? Why do I end up deciding to hold individual dividend stocks rather than relying on these Canadian dividend ETFs?
Before we dive into these questions about holding dividend ETFs vs. holding individual dividend stocks. Let’s take a look at some of the top Canadian dividend ETFs. Which one of the Canadian dividend ETFs comes out ahead? Let’s find out.
Top Canadian Dividend ETFs
ZDV – BMO Canadian Dividend ETF
BMO Canadian Dividend ETF was 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. The portfolio is rebalanced in June and reconstituted in December.
- MER: 0.39%
- Yield: 3.89%
- Distribution: monthly
- Holdings: 51 holdings
- Net Assets: $813.3M
- Top 10 Holdings: Bank of Nova Scotia (BNS.TO), Royal Bank (RY.TO), TD (TD.TO), Enbridge (ENB.TO), BCE Inc (BEC.TO), , CIBC (CM.TO), CIBC (CM.TO), Manulife (MFC.TO), Telus (T.TO), Canadian National Railway (CNR.TO), Bank of Montreal (BMO.TO)
- Holding Breakdown: 40.59% Financials, 13.70% Energy, 12.32% Utilities, 11.63% Communication, 8.09% Industrials, 6.99% Materials, 4.21% Consumer Staples, 2.15% Consumer Discretionary
VDY – Vanguard Canadian High Dividend Yield Index ETF
Vanguard FTSE Canadian High Dividend Yield Index ETF seeks to track, to the extent reasonably possible and before fees and expense, the performance of a broad Canadian equity index that measures the investment return of common stocks of Canadian companies that are characterized by high dividend yield. VDY tracks the FTSE Canadian High Dividend Yield Index. The fund invests primarily in common stocks of Canadian companies that pay dividends.
- MER: 0.21%
- Yield: 3.74%
- Distribution: monthly
- Holdings: 39
- Net Assets: $1.43B
- Top 10 Holdings: Royal Bank (RY.TO), TD (TD.TO), Enbridge (ENB.TO), Bank of Nova Scotia (BNS.TO), Bank of Montreal (BMO.TO), CIBC (CM.TO), Canadian Natural Resources (CNQ.TO), TC Energy (TRP.TO), BCE Inc. (BCE.TO), Nutrien (NTR.TO)
- Holding Breakdown: 58.3% Financials, 22.7% Oil & Gas, 8.8% Telecommunications, 5.8% Utilities, 3.9% Basic Materials, 0.2% Industrials, 0.2% Real Estate, 0.1% Consumer Services.
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. The holdings in XDV are selected based on methodology analysis by dividend growth, yield, and payout ratio.
- MER: 0.55%
- Yield: 4%
- Distribution: monthly
- Holdings: 29
- Net Assets: $1,895.13M
- Top 10 Holdings: CIBC (CM.TO), Bank of Montreal (BMO.TO), Royal Bank (RY.TO), Canadian Tire (CTC.A), Bank of Nova Scotia (BNS.TO), Labrador Iron Ore (LIF.TO), BCE (BCE.TO), TD (TD.TO), TC Energy (TRP.TO), National Bank (NA.TO)
- Holding Breakdown: 56.67% Financials, 11.31% Communication, 10.98% Utilities, 6.2% Energy, 6.01% Consumer Discretionary, 5.75% Materials, 2.40% Industrials, 0.369% Cash.
PDC – Invesco Canadian Dividend Index ETF
Invesco Canadian Dividend Index ETF 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 Invesco ETF invests primarily in Canadian equity securities with 95% exposure to Canada and 5% to other countries.
- MER: 0.56%
- Yield: 4.1%
- Distribution: monthly
- Holdings: 44
- Net Assets: $878.49M
- Top 10 Holdings: Bank of Nova Scotia (BNS.TO), Royal Bank (RY.TO), TD (TD.TO), Enbridge (ENB.TO), Bank of Montreal (BMO.TO), Canadian Natural Resources (CNQ.TO), Manulife (MFC.TO), CIBC (CM.TO), Sun Life Financial (SLF.TO), TC Energy (TRP.TO)
- Holding Breakdown: 53.6% Financials, 20.12% Energy, 11.21 Telecommunication, 9.32% Utilities, 3.217% Real Estate, 2.06% Consumer Discretionary, 0.28% Health Care, 0.24% Materials.
iShares S&P/TSX Canadian Dividend Aristocrats 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. The underlying index screens for large, established Canadian companies that increased ordinary cash dividends every year for at least five consecutive years.
- MER: 0.66%
- Yield: 3.15%
- Distribution: monthly
- Holdings: 86
- Net Assets: $1,021M
- Top 10 Holdings: Canadian Natural Resources (CNQ.TO), SmartCentre REIT (SRU.UN), Enbridge (ENB.TO), Keyera (KEY.TO), Pembina Pipeline (PPL.TO), Power Copr (POW.TO), CIBC (CM.TO), Fiera Capital Corp (FSZ.TO), BCE Inc (BCE.TO), Great West LifeCo (GWO.TO).
- Holding Breakdown: 29.47% Financials, 16.57% Energy, 11.50 % Real Estate, 10.13% Industrials, 9.68% Utilities, 6.91% Consumer Staples, 6.01% Communication, 4.11% Materials, 2.76% Consumer Discretionary, 1.81% Healthcare, 0.7% IT , 0.35% Cash
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. XEI is designed to be a long-term foundational holding for Canadian dividend investors.
- MER: 0.22%
- Yield: 3.7%
- Distribution: monthly
- Holdings: 75
- Net Assets: $1,544.7M
- Top 10 Holdings: Canadian Natural Resources (CNQ.TO), Suncor (SU.TO), Royal Bank (RY.TO), TC Energy (TRP.TO), Enbridge (ENB.TO), TD (TD.TO), Bank of Nova Scotia (BNS.TO), BCE (BCE.TO), Telus (T.TO), Bank of Montreal (BMO.TO)
- Holding Breakdown: 31% Energy, 30.26% Financials, 13.98% Communication, 13.24% Utilities, 5.04% Real Estate, 2.57% Consumer Discretionary, 1.92% Materials, 0.87% Industrials, 0.51% Cash, 0.42 Health Care
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. XIU is the largest and most liquid ETF in Canada and started trading in 1990, making it the first ETF in the world.
- MER: 0.18%
- Yield: 2.42%
- Distribution: quarterly
- Holdings: 60
- Net Assets: $11,122.3M
- Top 10 Holdings: Royal Bank (RY.TO), TD (TD.TO), Shopify (SHOP.TO), Bank of Nova Scotia (BNS.TO), Brookfield Asset Management (BAM.A), Enbridge (ENB.TO), Bank of Montreal (BMO.TO), Canadian National Railway (CNR.TO), Canadian Pacific Railway (CP.TO), CIBC (CM.TO),
- Holing Breakdown: 37.50% Financials, 14.49% Energy, 10.65% Industrials, 10.04% IT, 9.45% Materials, 5.63% Communication, 3.77% Consumer Staples, 3.73% Consumer Discretionary, 3.15% Utilities, 0.75% Real Estate, 0.52% Health Care, 0.3% Cash
DGRC – CI WidsomTree Canada Quality Dividend Growth Index ETF
CI WisdomTree Canada Quality Dividend Growth Index ETF seeks to track, to the extent possible, the price and yield performance of the Wisdom Tree Canada Quality Dividend Growth Index. The index is a fundamentally weighted index designed to provide exposure to dividend-paying Canadian companies with growth characteristics.
- MER: 0.21%
- Yield: 2.12%
- Distribution: quarterly
- Holdings: 49
- Net Assets: $417.93M
- Top 10 Holdings: Royal Bank (RY.TO), Magna (MG.TO), Canadian Pacific Railway (CP.TO), Rogers Communications (RCB.A), TD (TD.TO), Restaurant Brands (QSR.TO), IGM Financial (IGM.TO), Shaw Communications (SRJ.B), Canadian National Railway (CNR.TO), Thomson Reuters (TRI.TO)
- Holding Breakdown: 28.59% Financials, 24.95% Industrials, 12.62% Telecommunication, 17.01% Consumer Discretionary, 9.14% Materials, 6.33% Consumer Staples, 1.27% IT, 0.08% Healthcare
iShare Core MSCI Canadian Quality Dividend Index ETF seeks to provide long term capital growth by replicating the performance of the MSCI Canadian High Dividend Yield 10% Security Capped Index, net of expenses. This ETF selects securities with strong overall financials, including solid balance sheets and less volatile earnings. XDIV is designed to be a long term core holding for Canadian dividend investors.
- MER: 0.11%
- Yield: 3.49%
- Distribution: monthly
- Holdings: 23
- Net Assets: $646.2M
- Top 10 Holdings: Bank of Nova Scotia (BNS.TO), Royal Bank (RY.TO), TD (TD.TO), CIBC (CM.TO), TC Energy (TRP.TO), Nutrien (NTR.TO), Manulife (MFC.TO), Sun Life (SLF.TO), Fortis (FTS.TO), Power Copr (POW.TO)
- Holding Breakdown: 59.28% Financials, 11.36% Utilities, 10.11% Communication, 9.87% Energy, 8.16% Materials, 0.66% Cash.
Horizons Active CDN Dividend ETF (HAL)
The Horizons Active Cdn Dividend ETF is an actively managed ETF with a mandate to deliver long-term total returns consisting of regular dividend income and modest long-term capital growth. The fund seeks, to the best of its ability, to hedge its non-Canadian dollar currency exposure to the Canadian dollar.
The investment objective of the Horizons Active Cdn Dividend ETF (the “ETF”) is to seek long-term total returns consisting of regular dividend income and modest long-term capital growth.
- MER: 0.67%
- Yield: 3.07%
- Distribution: quarterly
- Net Assets: $99.6M
- Top 10 Holdings: Royal Bank (RY.TO), TD (TD.TO), Telus (T.TO), Summit Industrial REIT (SMU.UN), Imperial Oil (IMO.TO), Bank of Nova Sotia (BNS.TO), WSP Global (WSP.TO), Granite REIT (GRT.TO), Tourmaline Oil (TOU.TO), Canadian National Railway (CNR.TO)
- Holding Breakdown: 25.32% Energy, 23.6% Financials, 18.61% Industrials, 11.91% Real Estate, 6.07% Materials, 4.12% Comuncations, 4.10% Utilities, 2.88% Healthcare, 2.81% IT, 0.59% Cash
Top Canadian Dividend ETFs – Sector Diversification
Here is the sector diversification summary of the top Canadian dividend ETFs. Because the S&P/TSX Composite Index has a large exposure to the financial and energy sector, it shouldn’t come as a surprise that these Canadian dividend ETFs also have a large exposure to these two sectors.
|Telecom & IT||8.8||11.63||11.31||6.71||13.98||15.67||11.21||13.89||10.11||6.93|
However, it is interesting to see the likes of VDY, XDV, PDC, and XDIV are very financials heavy. I found it very interesting that DGRC has no exposure to the utility sector at all when Canadian utility stocks offer a very stable and solid dividend yield.
Top Canadian Dividend ETFs – Additional Analysis
To make it easier to compare the different dividend ETFs, I have put together a table for additional analysis. It’s interesting to see that all dividend ETFs have different numbers of holding and the top holdings are currently dominated by one of the Canadian banks or Canadian Natural Resources.
|ETF||Yield||5 Year Return||MER||Distribution Frequency||Net Assets||Holdings||Top Holding|
|VDY||3.74||9.8||0.21||Monthly||$1.43B||39||Royal Bank (RY.TO)|
|ZDV||3.89||7.94||0.39||Monthly||$813.3M||51||Bank of Nova Scotia (BNS.TO)|
|CDZ||3.15||10.32||0.66||Monthly||$1.02B||86||Canadian Natural Resources (CNQ.TO)|
|XEI||3.7||8.53||0.22||Monthly||$1.5B||75||Canadian Natural Resources (CNQ.TO)|
|XIU||2.42||10.67||0.18||Quarterly||$11.1B||60||Royal Bank (RY.tO)|
|PDC||4.1||8.40||0.56||Monthly||$878.5M||44||Bank of Nova Scotia (BNS.TO)|
|DGRC||2.12||9.54 (4 years)||0.21||Quarterly||$417.9M||49||Royal Bank (RY.TO)|
|XDIV||3.49||15.51 (3 years)||0.11||Monthly||$699.9M||23||Bank of Nova Scotia (BNS.TO)|
|HAL||3.07||9.25||0.67||Quarterly||$99.6M||?||Royal Bank (RY.TO)|
Some thoughts on Canadian 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.
- The five year returns for these top Canadian dividend ETFs vary significantly. XIU has the best 5 year performance at 10.67% followed closely by CDZ at 10.32%. Interestingly, CDZ’s MER is almost 0.5% higher than XIU.
- For the most part, these top Canadian dividend ETFs have similar dividend yields, with the exception of DGRC which has a low yield of 2.12%
- VDY’s top 10 holdings make up 70% of the entire fund assets so it is highly concentrated to the top 10 holdings and perhaps not as diversified as other dividend ETFs. On the other hand, although XDV only holds 29 stocks, the top 10 holdings only make up around 56% of the overall holding exposure so I’d say XDV is not as top 10 heavy compared to VDY.
- CDZ, PDC, XDV, and HAL all have relatively high MER compared to the rest of the dividend ETFs.
- I personally would question XDV’s holding of Labrador Iron Ore at 4.8% of the ETF. Due to iron ore price, Labrador Iron Ore’s dividend yield can vary drastically.
- VDY, XDV, PDC and XDIV all hold over 50% stocks in the financial sector. This is a bit surprising given that the S&P/TSX Composite Index only has about 28% exposure in the financial sector. Having said that as we saw throughout the pandemic, dividends from Canadian banks and Canadian insurance companies are generally safe.
- None of these Canadian dividend ETFs hold a large percentage of Health Care stocks. CDZ is the only ETF that holds the largest percentage of stocks in Health Care at 1.81%. I suppose it’s because there aren’t too many Health Care companies here in Canada.
- XEI has over 30% in the Canadian Energy sector, which I think is a bit too high for my liking.
- If you are looking to create a spreadsheet to track all your ETF investments, take a look at my Google Spreadsheet template for ETFs.
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. Personally, 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 which provides good diversification. If your goal is yield with decent diversification, then XEI may be a good choice.
- XIU has the lowest MER with a decent yield of 2.4%, which is the second lowest yield among these best Canadian dividend ETFs. XIU tracks closely with the TSX composite index. Therefore, if you want an ETF that tracks the Canadian market while focusing on both dividend income and total return, XIU may 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? Well, here are my reasons why we don’t own Canadian dividend ETFs in our dividend portfolio.
- 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 around 14% of our portfolio in Royal Bank? Similarly, I personally wouldn’t hold dividend paying stocks like Labrador Iron Ore or Tourmaline Oil.
- What if I want to have heavier exposure to consumer staples or other sectors than the dividend ETF has selected? It would be easier to simply purchase individual dividend stocks and control my portfolio’s sector weighting myself and not pay the MER fees altogether.
- 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. This is especially important when we eventually live off dividends. Having a predictable dividend income provides peace of mind.
- I like having controls, so I prefer owning the Best Canadian Dividend Stocks. Owning individual stocks gives me more control and allows for a more predictable dividend income. It’s nice to know exactly how much dividend income we’ll be receiving each month.
- 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 (or $0 if you trade using WealthSimple Trade or National Bank Direct Brokerage. Once the portfolio is set up, I would not touch it. Say I hold XIU with a market value of $500,000. Although Questrade offers free ETF purchases, each year I would be paying 0.18% of the management fee, or $900. It’s not a lot of money to pay given a market value of $500,000. But it is $900 more than what I have to pay if I were to hold only individual dividend stocks. For commission free trading, you might want to check out Wealthsimple Trade.
- Finally, with a portfolio comprised 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 weight in my portfolio. I also get to decide whether I would enroll in DRIP or not. Many Canadian dividend paying companies do provide discounts when you are enrolled in DRIP, so I would 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 honour the DRIPing discount).
- Similarly, while Canadian bank ETFs are great, I think it is far better to hold individual Canadian bank shares rather than relying on a sector specific ETF.
Canadian Dividend ETFs offer far better diversification and still provide solid income. But not all dividend ETFs are created equal. If you decide to own one of these Canadian dividend ETFs, definitely do your homework. I hope my analysis of top Canadian dividend ETFs was helpful.
For Mrs. T and I, we believe owning individual dividend stocks is a better approach than owning dividend ETFs. Owning individual dividend stocks allows us to have more control over our portfolio and save money in the long run. If we want asset and geographical diversification, we use international index ETFs like VCN or XAW.
Now some investors may consider using covered call ETFs to generate more dividend income. Is it a good idea? I think this depends on many factors.
If you are looking for income, one of the best preferred share ETFs might be an option, if you are OK forgoing potential returns. For income, you may also want to consider one of the best Canadian REIT ETFs.
98 thoughts on “Top Canadian Dividend ETFs – Why we don’t own them”
Nice research but I’m surprised you didn’t include “BMO Low Volatility Canadian Equity ETF (ZLB) in your mix. It topped all of the above in 5-Yr TR and has had excellent dividend growth as well. Its holdings are dispersed more evenly than the other ETFs except for the 0% content in the energy & healthcare sectors. The lack of energy content is likely due to the high volatility in that space.
Thank you. Good point on ZLB, didn’t include it because it’s not considered as the typical dividend ETF. It’s more utility focused.
I love your content, very informative. Thanks for sharing with us.
I am confused as to the significance on the photo of the young woman against a brick wall. How does she relate to investing?
Nothing, it was a pic I took a while ago and decided to use for the post. I don’t see anything wrong with that.
My wife and I have between us $ 125000 in TSF and want to invest to at least equal inflation. I’m 90 and my wife 83. Do you think dividend EFT s are suitable for us?
Without knowing more details it’s nearly impossible to provide any suggestions. Please do your own due diligence when it comes to investing. At your age, you probably want to look at more stable investments, like bonds.
What is the best undervalued Canadian stock to buy right now after the market dip on Jan. 25, 2022.
I continue to like AQN.
I hold an increasing amount of PDC in my RRSP for dividend diversification and while in a vacuum I wouldn’t buy it I have it now because a) there are no fees to buy it and b) no minimum purchase required. So I’m slowly accumulating it when it “goes on sale”. However as I accumulate more I start to consider the higher MER. How would you evaluate the cost/benefit basis of owning this as a higher MER offering versus paying fees for a lower MER offering?
IMO I think there’s no point paying a higher MER if there are similar products that cost less.
I personally like XEI too and agree with the selection and have it in my portfolio. However, I’m also a believer in individual stock investing because I can pick the company and hold for long-term and gain more from capital appreciation and dividend growth. In my view this approach gives you the real-feel or experience of part-owning a business for the long-term and understanding the business cycles/journey. Imagine this, holding 100 shares of a blue chip company feels dramatically better than holding 100 units of an ETF.
Having said all each of us have our own individual situation and choices, so XEI ETF would be great for someone who wants a one ready-made package. For a more advanced investor, stocks make sense and some investors would try both (say hybrid) for different accounts/different goals or to get the best of both worlds. Its great that we have many options to choose from!
Thanks for the great post with a really in-depth analysis of the pros and cons (cons are mostly time and efforts required to research the dividend-paying companies) of Dividend investing.
If I want to switch from an all-in-one ETF (say XBAL, with the market value of portfolio is 10000 $) to Dividend stocks, won’t I be behind after the switch due to lost opportunity of tax deferral?
For example, if I sell XBAL. Let us say my ACB was 7000 $. So I will end up paying capital gains tax on half of the gains on XBAL (=1500 $ taxable amount). Let us say my current marginal tax rate is 33 % so I will pay a tax of 500 $. That means I will have only 9500 $ left to invest in dividend stocks. My dividend stocks portfolio has to compensate for the gains on this lost opportunity to invest 500 $. Am I missing something? I am sure there are many more variables that need to be considered. Can you share your thoughts and/or point me to some good boost posts.
Oh, and how much time do you think I should budget to spend on a weekly/monthly/yearly basis to research and maintain a healthy dividend stocks portfolio of say 25 to 50 companies?
It really depends on how knowledgeable with dividend investing and how big your portfolio is. For me, I spend maybe one to two hours every other month.
Yes that’s assuming you’re holding XBAL in your taxable account.
Hi Bob, thank you so much for this post , I have a question for you in regards to GWO and POW do you think holding both as a double dipping ? since POW kind a own GWO and few others ?
I typically like to invest in the main company.
Appreciate your knowledge, website and this post. I notice that DGRC (CI WisdomTree Canada Quality Dividend Growth Index ETF) wasn’t mentioned. I would appreciate your thoughts on this one compared to those dividend ETFs you did mention.
The holding selection is interesting since Thomson Reuters, Rogers, Shaw are the top 3 holdings. I personally wouldn’t hold them as my top 3 holdings.
Thanks for sharing this, very helpful
If I want to hold 2 or 3 ETFs you mentioned in this article, is it a good idea holding XDIV+ZDV+XIU?
What’s your reason for holding multiple of these ETFs?
My main reason is sort of balance out across different sectors and broader coverage. For example, it seems xdiv doesn’t include BMO
So do you prefer only hold one?
We prefer to build our own ETF by holding individual dividend paying stocks.
I have a high salary. Dividend stocks look less attractive than growth stocks/ETFs right now when looking at Quebec + Federal income tax rate.
However, once I retire, pension split and drop several tax brackets, dividend stocks will offer tax advantages over capital gain.
I am glad I read your blog in my 30s. So I can start investing a small portion of my savings in dividend stocks as it takes time to get significant dividend income.
Thanks for sharing this. I’m surprised there is no talk of tax implications. Strong allure of dividend investing is the preferential tax treatment they receive. Do you know which of these ETFS provide pure dividend vs distributions? From what I understand, latter may not be considered a dividend (eg. real estate rent collections) and hence does not receive the same tax benefits.
Yes that’s one key point I forgot to mention. 🙂
Pretty extensive coverage on the different ETFs, thanks!
The point you are making about some/most of the ETFs having an oversized exposure to the financial sector is very important indeed. I think concentration is mostly ignored when thinking about country specific ETFs.
In my home country – Hungary – 4 companies make up 94% of the main index (BUX), so the concentration is obvious there, but not in the case of Canada, so appreciate the color on that!
Again, good work and keep it up 🙂
First off great read. I really enjoyed your article.
Secondly I am interested in your take on ZWC – BMO Canadian High Dividend Covered Call ETF.
The dividend yield is quite good, it covers a large and diverse range of holdings.
The MER is quite high but currently a MER of 0.72% vs. a yield of 7.86% seems pretty easy to swallow.
I agree that vs. stocks you will be paying the management fee annually but it would be quite a stock portfolio that will pay ~6% dividend or more on average.
Thank you Burt.
Covered calls just add another layer of complexity. You have to decide yourself whether utilizing covered calls is worth the extra fees or not.
I have been a big fan of XEI for many years. And if you don’t have the time and patience to pick stocks, it’s a very easy way to get a decent stream of monthly income. But in general I pick my own stocks.
It’s clear that some of these ETF entries are just there to pad a fund companies offerings. You can basically replicate VDY by buying two banks, an energy and a telco. That’s just embarrassing. If one is charging a management fee, please at least provide some expertise and value.
I do like to pore over the holding lists for the different ETFs, for ideas. If I see a company represented in a bunch of the companies’ lists, it makes me wonder why I don’t own it. So I go and do some research.
Great article Tawcan! Please let me know if my reasoning below is sound.
I am young, and settling on buying an all-in-one Canadian dividend ETF, maybe a couple, instead of buying individual dividend stocks.
This is because I don’t have the time or motivation to research individual stocks and companies and predict when they will fall off. I came across a stat in my business class that the average businesses’ tenure on the Fortune 500 List has decreased from 30-20 years from 1965-1990, and will be 14 years by 2026. I understand many big companies will last, but many also won’t.
A dividend ETF, If I am understanding correctly will be able to drop companies that fall, and add the ones that replace them or grow, whereas if I pick individual dividend stocks I must do this on my own, as it happens, or ideally before these shifts happen, which is very hard if not impossible to predict. I would rather have a rule-based automatic restructuring of holdings, which guarantees I don’t hold failing companies, one I can buy and forget about. Of course, this reasoning is assuming the dividend ETF restructures its holdings on a somewhat frequent basis.
Is there anything faulty in my reasoning? I see where individual stock picking could be advantageous, but for me, if the above is correct, I think dividend ETFs are for me.
Continue the great work and I look forward to your response.
Your reasoning seems OK but maybe it makes more sense to hold an index ETF in that case rather than a dividend ETF?
I have a significant amount of my portfolio in XEQT for my couch potato index investment. But I was intrigued by dividends, initially through Million Dollar Journey.
I’m looking to invest in dividends very soon, and I’m not the most term-savvy/experienced so I want to make sure I’m doing what’s right for me, with the small amounts, but important money I have.
Is there a specific metric or term I should look for to determine how often a ETF reassesses its holdings? This seems to be the most important metric, besides of course how the ETF picks stocks – which also confuses me (which one is best picking strategy!? that’s all I need to know! haha).
Anyways, the more regular these reassessments the better I imagine, as I simply want to track the best dividend stocks, and not hold faltering companies, which if I’m correct, I would hold less ideal companies if I picked individual dividend stocks on my own, (given I don’t have the resources/time/motivation to be checking performance regularly enough).
I really appreciate you taking the time to respond and generously offering your knowledge.
You may want to take a look at the ETF’s holding turnover rate if that number gets published.
Are you saying here that the ETF turnover rate is very low for those Dividend ETF? Therefore you would have a very low turn over while holding the stock directly?
These dividend ETFs might actually have a relatively high turn over rate. It’s something you need to watch out for.
what are your thoughts on Vanguards VRIF ?
VRIF is an interesting idea as it’s 50% stocks and 50% bonds with 4% distribution. If you cares more about the distribution and do not care too much about price appreciation, this ETF might suite you well. I think more time is needed to see how this ETF will perform though.
Hi, Since VRIF says if their income is lower than 4% , part of their payment to shareholders could be taken from capitol, I was wondering how that affects taxation. Since a normal dividend is income and return of capital is just them giving me some of my money back, are they taxed differently?
Return of Capital is certainly taxed differently than dividends, that’s why it gets a bit tricky with some of these dividend ETF distributions.
Hi Bob: ETFs is a topic I have a strong opinion, but that’s me. When one looks at the extensive review you’ve done on these ETFs, I don’t believe you’d spend much more effort (probably less) in identifying quality DG stocks, whether they be Canadian or US. Why bother owning all the stocks within an ETF, settling for average income and returns, if you can identify quality Income producers and obtain better income and returns?
I’ve invested to generate Income and ignored Capital appreciation. It’s my belief that if one can invest in stocks which pay and grow your income, capital appreciation will follow.
“I don’t believe you’d spend much more effort (probably less) in identifying quality DG stocks” – That is absolutely not true. Please don’t put words in my mouth. If you have read my other posts on here, and what I wrote in this article you’ll see why I do not believe in owning dividend ETFs.
Hi! What do you suggest for a newbie investor wanting to build a dividend portfolio, but with little money to invest. Will start at 1k, then able to invest around $500 each month.
You might want to take a look at these articles:
Typically my strategy is indexing, but when I’m reading more about the Smith Manoeuvre, I’m thinking getting higher dividend would be worthwhile with the tax credit. I’ve never picked individual stocks before so am a bit hesitant.
With Smith Manoeuvre, it makes more sense to invest in dividend payings stocks so you’re earning a rate above the mortgage interest rate. 🙂
Whats your thoughts on XDIV? it has a really low MER and similar to XDV in terms of holdings. Also, what are your thoughts of holding XDIV and VCN (50-50) as part of the Canadian portion of equities mix in a larger portfolio?
For background, I am trying to decide what investments to select for a non-reg account as part of my Smith Manoevre strategy.
Would love to hear your thoughts.
Thanks in advance.
XDIV holds 25 stocks where XDV holds 30 stocks. They are very similar. VCN holds similar stocks but has a much larger holding.
It really depends on what your strategy is. Are you doing purely index or hybrid? If hybrid, why not just build your own dividend portfolio rather than relying on ETF?
Hi Bob, can you tell me why you said that you like dividend paying stocks because you know more precisely what your income will be a month, is this not the same for the yield on an ETF?
If you look at VDY distribution history, for example, you’ll see that the amount is all over the place so it’s nearly impossible to know precisely what your income will be:
Where as a stock like TD you know exactly how much you’re getting when there’s a dividend payment. Hope this helps.
Thanks for the reply Bob, how about XEI? The’re divident history is very consistent and has been rising since January 2012, .077 to .091. I am retired and looking for the divident income. I do have stocks as well as ETFs that I won’t be touching for a long time but seeing the consistency of XEI gives me some security and the capital seems safe. Thoughts?
Looking at the XEI info page on iShares, I see the last 3 distributions were $0.091, the 3 before that were $0.082, then the 3 before that were $0.089, then 3 before were $0.089. I suppose XEI’s distributions are more consistent but not sure why it went from $0.089 to $0.082 for 3 quarters.
With your other blog on XAW and VXC. I thought you are a proponent and active investor in ETFs but this blog is against ETFs.
So I am confused now
I’m all for index ETFs but I don’t like these dividend ETFs due to the reasons I stated in this post. Hope this helps.
i see the reasoning ..
however : my reasons for going simple are
my wife or daughter are not savvy and i prefer to leave easy portfolio
its too easy to tamper with stocks … for most of us anyway
i prefer to pay a fee for making me forget instead of thinking if i should change etc
i am the rare beast with no other income . so i can get it all tax free
and finally i am also going with the new all in one ETF’s
no rebalancing for me to fret over or not do
the tax is minimal anyway .. its so time consuming to try and so the perfect tax ..
the US witholding is not as bad as it sounds for instance .
simple not perfect is my new financial mantra … i will stay 60/40 in my current retired years .
Right, if you want to keep it simple, dividend index ETFs may be the solution for you. And the new all in one ETFs certainly look interesting if you just want to have one fund that covers everything.
Thanks, Bob! When my portfolio goes over 100K, as I am at the beginning, I will start building my own portfolio. I should also admit that it is difficult to find an ETF that reflects my vision – distribution among different sectors. Most of the ETFs I see currently , heavily rely on finance or US market e.g.
The calculation with 500K is correct. Unfortunately, this is the case where you know what to do, how to do it and have a big pile of money. What about this scenarion. Lets assume I have 30K room for TFSA and just starting. I need, to build diversified portfolio. I will buy 10 companies for 3K each. Some people will not use DRIP in order to keep the dividend amount and purchase other companies equity. The second year you have new room 6K and you would like to buy another 5 companies or update the portfolio.. So you get the idea. When a person starts investing every purchase has a fee.
That’s true, there are fees when you are starting out. However, with mutual funds and index funds, you’ll be paying fees continuously even if you completed building your portfolio.
Thanks for sharing your perspective Bob. I don’t currently hold any ETFs at all.
I’m looking into preferred shares (specifically WN.PR.A). Thoughts on PR shares as a whole?
I think preferred shares have a place in your portfolio. Warren Buffett certainly holds preferred shares.
I have a inflation protected pension and live sorta mostly frugally. I have been thinking about cashing my stocks that pay dividends because they don’t drip as I don”t make enough of a dividend to buy one share. I’m thinking of buying a dividend etf that drips. Comments?
That might be worth while to buy dividend ETF. Alternatively, you can find a broker that would allow for full DRIP so you can buy partial shares.
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.
the only ETF I hold is XAW ex Canada. That way I cover everything else with one low cost.
Same. XAW & VCN & VSB here 🙂
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
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.
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!
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).
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.
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.
I know your broker is Questrade and you’ve mentioned that they provide synthetic DRIPs, but do you know if Questrade offers discounting DRIPs?
Questrade does not offer discounting DRIPs, TD Waterhouse does.
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?
It depends on the company, some offer up to 10%, some offer 5%. You need to check on each company’s website.
What is a discounting DRIP? I am with TD (Canadian) and signed up to DRIP everything that I can – do you need to request this or is it available on apply to some investments?
I have never heard this term before. Thanks- LOVE your blog!
Thank you. Some companies offer discounts when you DRIP. So instead of dripping shares at say $50 per share, if the discount is 5%, then you buy the share at $47.50 per share. TD seems to honour the discount automatically although a reader did point out that TD may abandon DRIP discount.
Just reading TD Waterhouse website 2020-01-14 that they are discontinuing discounted DRIPs until further notice.
Hmm interesting, I didn’t know that.
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.
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.
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!
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…
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.
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!
Dividend ETFs are just a subset of index ETFs, just dividend ETFs are more specific when it comes to selection criteria.
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.
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.
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.”
“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.
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.
There is a cost to selling shares…there is no cost to collecting dividends…the after-tax benefit of capital gains vs. dividends depends entirely on the sources of your income and your income level.
If I were an Ontarian receiving $45K dividend income, solely, I would not pay any income tax (actually, I would receive a small refund without having paid any taxes). Not so if this income was from capital gains.
If I were an Ontarian receiving $100K dividend income, solely, I would be subject to a higher rate of income tax than capital gains and I would probably lose any OAS benefit eligibility, resulting in a much higher level of income taxation than capital gains.
From your post re: capital gains vs. dividends — ‘The former is actually preferable from a tax standpoint, and it’s strictly math…’: not necessarily so.
There is a cost through taxes to collecting dividends during decades while working. The more wealthy or highly paid you are, the less you want realized income like dividends. Capital gains are the way to go when dealing with high net worth/high income people. There’s always a slow tax drag for dividend investors who are in low/medium tax brackets as well. Growth and dividends are the same money, just not taxed the same. Selling 2% + 2% dividends won’t let you run out of money if you make 7% total, and it’s more tax efficient… again if you’re in those high tax brackets. The difference is huge between the capital gain tax and the dividend tax credits when you start to earn 90 000$ or more a year. I just wanted to add that precision.
What you said it’s true only if you invest dividend paying stocks/ETFs in taxable accounts.
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.
Haha I prefer to hold the stocks directly as well. 🙂