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:
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.
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%.
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.
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?