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Top Canadian Dividend ETFs for your portfolio

About a year and a half ago, I wrote while dividend-investing takes some time and effort, investing in some ETF products in my opinion does not.  Investing can be rather simple – using some great Canadian Exchange Traded Funds (ETFs) in your portfolio.

Today’s post will revisit some of my content posted in September 2011 (with new material of course) focusing on some great Canadian dividend ETFs to consider.

Let’s get into it!

Don’t like to invest in stocks directly?  Want to forget trading almost for good?  No sweat, these Canadian dividend ETFs have you covered.  What are the benefits of investing in dividend ETFs?  First of all, you get many great dividend paying stocks in your portfolio; instant diversification over the active stock picker.  Second, many of these dividend ETFs charge low management fees.  Third, you get paid cold hard cash when distributions are paid monthly or quarterly depending upon the fund.

Here are some of my favourite Canadian dividends ETFs:

XDV – iShares Dow Jones Canada Select Dividend Index Fund

This ETF “seeks to provide long-term capital growth by replicating, to the extent possible, the performance of the Dow Jones Canada Select Dividend Index.”  This index is comprised of 30 high-yielding, dividend-paying Canadian companies.  If you’re not comfortable with direct stock ownership, XDV is a good consideration, with moderate fees; the management expense ratio (MER) is 0.55% and decent performance:  since inception the fund has returned about 6%.  The yield on XDV is over 4%.  Beyond the modest fee, there is one downside I see to this product – over 50% of the securities owned are in the financial sector.   For comparative purposes, the S&P/TSX Composite Index has about 30% weight in financials.  So, for your returns, as Canadian banks and life insurance companies perform so should XDV.

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

For equities to qualify as part of this ETF, securities must “a) be common stock or income trust listed on the TSX and in the S&P Canada Broad Market Index (BMI); b) have increased ordinary cash dividends every year for 5 years, but can maintain the same dividend for a maximum of 2 consecutive years within that 5-year period; c) have a minimum C$ 300 million float-adjusted market cap.”  CDZ holds more than double the holdings of XDV and because of more active management, it costs more; the MER is almost 0.7%.  It also holds some riskier companies.  A few companies in this fund are on the verge of making some dividend cuts (e.g., AGF Management), at least I expect so.  This ETF pays monthly dividends and sports a yield around 3.5%.

VDY – Vanguard Canadian High Dividend Yield Index ETF

Thankfully for Canadian investors, Vanguard is here.  This ETF sports the lowest MER is this category, at 0.30%.  This ETF seeks to track, to the extent possible the “performance of abroad Canadian equity index that measures the investment return of common stocks of Canadian companies that are characterized by high dividend yield.”  As a young fund, the monthly distributions for VDY are not as mature or consistent as the aforementioned XDV or CDZ but this will change over time.  The only downside I see to this product, the top-10 holdings dominate it; these holdings make up over 60% of the content.

ZDV – BMO Canadian Dividend ETF

For all around performance, yield, cost and diversification, this Canadian dividend ETF is hard to beat.  The MER for this product is just a tad higher than VDY (costs 0.35%) and but it pays better than most in this space, with a monthly yield approaching 5% of late.  ZDV is constituted more closely to the weightings in the S&P/TSX Composite Index; with about 30% financials, 30% energy and 12% utilities, so it’s a more balanced product over iShares XDV or CDZ.

There are other Canadian Dividend ETFs to consider for your portfolio but these are the frontrunners in my opinion.  If you have some aversion to buying and holdings some Canadian stocks, and would rather pay a small fee to passively invest in the market, start your research with these ones above.  In future posts over the next few months I’ll highlight some other Canadian equity ETFs, some great Canadian bond ETFs and international ETFs for your portfolio.

Do you own any of these products?  Instead of dividend ETFs, do you invest in dividend paying stocks directly?

Filed in: Dividends, Exchange Traded Funds (ETFs)

19 Responses to "Top Canadian Dividend ETFs for your portfolio"

  1. Wayne Cox says:

    Very interesting article. Nice summary. I would like see how much of the distribution amount is return of capital for tax purposes. In the case of ZDV, during the 2012 year, over 20% of the distribution was giving you back your own money. Over the long run, this leads to a drop in the NAV and the fund will be unable to match any index it is tracking. A large ROC does seem to make the yield nicer but in the long run, it always seems to be a loosing proposition.

    • Thanks Wayne. For ZDV, that seems like a lot, but I guess that’s how they get the yield so high? Like owning some CDN stocks directly, I suspect a larger ROC (for ETFs) simply means less potential capital appreciation. Either you want steady income or you want steady growth; hard to have both – especially in this market climate. Thoughts?

  2. Great list MoA. Though I personally prefer to buy stock directly, checking the constituents of these ETFs might provide me and other readers with a list of stocks to investigate further. Thanks!

    • Thanks. I do the same, buy stocks directly if I can. I’ve got another 5-10 CDN companies I’d like to own then my portfolio will be largely complete. Just sit back and watch the dividends roll in for years to come. I hope!

  3. BJ Lorch says:

    Great summary. I currently hold about 85K of CDZ. Am I right in multiplying this by the MER to estimate the annual cost of holding the fund (works out $570). Can see why holding a good selection of the individual stocks would be advantageous given that a $9.99 commission to buy and sell are one time fees (assuming also that you buy and hold and why not if they are blue chip material).

    • You got the essence of my post in only a few words :) All in all, I’m a big of a dividend ETFs BJ, just that, if I can own the stocks directly in sufficient quantities, I certainly will. My portfolio isn’t big enough yet to avoid Canadian ETFs altogether but maybe someday it will be.

      Thanks for your comment and continued success to you.

      Mark

  4. Thanks Mark,
    As you know I don’t do any of this stuff on my own. When the time comes I think I might look into investing in the ETF’s so thanks for sharing this information. IT really helps a newbie to investing like me to understand the basics which can be overwhelming at the best of times. Cheers

  5. Shawn says:

    Hi Mark,
    Nice article, always enjoy reading your posts. One question for you (or any of your readers for that matter) regarding ETFs. Are there any ETFs out there which allow you to invest using an Automatic Investment Plan? For example, $50 every week?

    I had thought I read a while back that some products like this existed. If so, any particular companies or names would be appreciated.

    Thanks!

  6. Wayne says:

    This ROC thing is very frequently used in yield type products to boost the return and sex-up the numbers. Most closed end funds do this. Investors by the product based on the yield but don’t realize quite a bit of the yield is actually their own money coming back. It does reduce your cost base at tax time. You are right that the practice tends to erode the NAV over time. Increases in the value of the holdings can’t keep up to the ROC. Basically, they give out more money than the holdings can generate.
    REITs are a slightly different situation because the key metric is the AFFO number. Don’t buy a REIT if the “dividend” exceeds the AFFO/share. The situation can’t be sustained forever and either a cut must be made or the REIT comes to market with more shares to raise the capital to pay the dividend. That action can’t go forever either. It’s called a Ponzi scheme.

    • Correct for REITs, re: AFFO per share.

      I try and stay away from most high-yield stocks. Anything over 5% yield with a payout ratio that exceeds 75% is a flag for me.

      When you’re getting a high yield, ETFs or stocks, you’re basically getting your own money back and there are dangers as you have said, getting your own money back won’t last that long either :)

      Wayne, are you strictly an ETF-man or do you own individual stocks as well?

  7. Anonymous says:

    @My Own Advisor
    Thanks for the reply… much appreciated. I’ll dig a bit on the Vanguard ETfs and if I find any useful info, I’ll make sure to pass along.

    All the best,
    Shawn

  8. Shehman says:

    Will it be wise to invest in each of these ETF’s you listed? Like invest 25% of my investments into each one of them? That way I’ll have a diversified portfolio?

    • Hi Shehman,

      I cannot offer any specific advice on my blog to readers, however, I personally like these ETFs for many reasons.

      Investing strictly in dividend ETFs is both good and bad. Good, in the sense you are investing in many blue-chip companies that pay dividends at a low cost. Bad, in the sense that you are not very diversified across all sectors, in international markets or in bonds to help protect your portfolio for equity declines.

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