Top Canadian Dividend ETFs for your portfolio

Last year, I shared my favourite Canadian Exchange Traded Funds (ETFs) on this site along with some top U.S. and international considerations for your portfolio.   The ETF landscape has changed a bit over the last year so today’s post will update some of that content, starting with my top Canadian dividend ETFs for your portfolio, sharing some reasons why I like these products and what to be mindful of.

Are you a tad nervous about owning dividend paying stocks directly?  For sure it’s not for everyone and there are risks involved.  Don’t sweat it, these Canadian dividend ETFs have you covered.  What are the benefits of investing in dividend ETFs?

  1. You get a number of dividend paying stocks in your portfolio for a modest fee.
  2. You get diversification (for a modest fee).
  3. You get paid cold hard cash monthly or quarterly depending upon the ETF distribution schedule.

Check out these picks below.

ZDV – BMO Canadian Dividend ETF

I think for all around performance, yield, cost and diversification, this Canadian dividend ETF is top-notch.

As of May 23, 2014 ZDV fast facts:

VDY – Vanguard Canadian High Dividend Yield Index ETF

Vanguard Canada rocks thanks to their low fees and diversified products.   The only downside I see to this product, the top-10 holdings dominate it; these holdings make up over 60% of the product.  I would prefer to own these companies directly (and I do).

As of May 23, 2014 VDY fast facts:

  • MER = 0.34%.
  • Yield about 2.7%.
  • Monthly payout.
  • The top holdings are the big-5 Canadian banks, Enbridge and TransCanada.

DXM – First Asset Morningstar Canada Dividend Target 30 Index ETF

A relative newcomer, established in February 2012, this ETF seeks to replicate the Morningstar Canada Dividend Target 30 Index – it goes after many of the largest and most liquid Canadian dividend paying companies.  This product is a bit pricy for my liking but is worthy of consideration even with a quarterly payout schedule.

As of May 23, 2014 DXM fast facts:

  • Management fee = 0.60%
  • Yield about 3%.

XDV – iShares Canadian Select Dividend Index ETF

This product underwent a name change earlier this year but the product remains essentially the same.  This ETF holds 30 of the highest yielding, dividend-paying companies in the Dow Jones Canada Total Market Index, using a methodology associated with dividend growth, yield and average payout ratio.   There are some wildcards in this product (meaning, some companies I wouldn’t own directly since the yield is too high for my liking) but on the whole if you’re looking for income for a modest fee you’ve come to a decent place.

As of May 23, 2014 XDV fast facts:

  • MER = 0.55%.
  • Yield almost 4%.
  • Monthly payout.

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

This product tracks the S&P/TSX Canadian Dividend Aristocrats Index, less fees and expenses.  Meaning, stocks in this ETF have increased ordinary cash dividends for at least 5 consecutive years, a decent criteria but this ETF also contains risky stocks like AGF and EIF, companies on the verge of a dividend cut.  A consideration for your portfolio but there are better choices (above) in my opinion.

As of May 23, 2014 CDZ fast facts:

  • MER = 0.66%.
  • Yield just over 3%.
  • Monthly payout.

There are other Canadian Dividend ETFs to consider, including many other dividend funds not mentioned here but today’s focus was on the top ETFs in my opinion.  Stay tuned for more of my favourite ETFs in the coming weeks.

Disclosure:  I used to own XDV a few years ago in my personal portfolio but sold it in favour of holding many individual stocks directly.

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

  1. Jonathan Babbitt · Edit

    Thank you for your insights. You mention that you own a number of the stocks which are represented by these funds. I know that doing so gets rid of the MERs but I feel as though you would pay quite a bit in trading fees (isn’t it typically $20/trade?). Most brokers I’ve used (currently QTrade) only let me purchase ETFs in increments of $1,000 (to avoid trading fees) which makes dollar-cost averaging difficult as well. Are there ways of dollar-cost averaging in smaller, more frequent purchases? Thank you!

    Reply
    1. Hey Jonathan,

      Very true, owning stocks directly instead of ETFs or funds gets rid of the MERs but there are costs to buy the stocks I own. The thing is now though, I don’t buy stocks very often, a few times per year.

      Owning these stocks amounts to about $100 or so in commissions and fees. $10,000 invested in XDV, for example, costs $55 per year. I figure I’m better off owning stocks directly now and some low-cost ETFs for my portfolio but at one point, XDV did make sense for me.

      Many other brokers have lower cost commissions for trades than $20. I recall Questrade is $4.95.

      To answer your other question, I’ve talked to many investors just starting out and they tend to use TD e-funds or lower cost mutual funds at a bank brokerage. This way, they don’t pay any fees to buy or sell those products. Here is some related reading:
      http://www.myownadvisor.ca/when-to-transition-to-owning-etfs-and-stocks/

      Reply
      1. Jonathan Babbitt · Edit

        Thank you for that link! I had searched the site a bit for something like that and it it answers my questions exactly.

        Reply
    1. Thanks for reading Doug.

      I consider XEI more of an equity product, it has 75 holdings I recall. I was going to profile it under top Canadian Equity ETFs in a few weeks. 🙂

      Most of these other dividend ETFs don’t have as many holdings as XEI, although VDY is an exception to that. I guess I excluded XEI from the list without understanding the underlying index it tracks, “S&P determines the median indicated annual dividend yield of all stocks in the S&P/TSX Composite with non-zero indicated annual dividend yields, as of the S&P/TSX Composite rebalancing date…and….. the top 75 stocks are selected from stocks with an annual dividend yield above the median as calculated in step 1.”

      I guess I always considered XEI more of an equity play but I could have easily included it in the “dividend ETF” category. XIU is not a dividend ETF but could be considered one based on its holdings, not the index methodology though.

      What I like about XEI?

      Great monthly distributions.
      Yields consistently around 4% and you can get capital appreciation on top of that.
      Holds many of Canada’s best dividend paying stocks.
      MER is low, which is good, at 0.20%.

      XEI is a nice income play for the fees it charges. I own many of the stocks XEI holds, same goes for VDY, XDV so I’m probably biased on the long-term prospects of those companies.

      Reply
  2. I own three of these (VDY, XDV, ZDV) and they are performing really well overall. I haven’t looked into the other two, because the three that I’ve mentioned before seem to be solid. You mention that you used to own XDV but sold it for individual stocks. What made you decide to do that? Just curious.

    Reply
    1. Nice Daisy. re: owning those ETFs.

      As for XDV, I sold it because I found over time, instead of paying the management fee I could own those stocks directly. I also didn’t need to worry about the fund turnover, what they bought and didn’t buy for the fund – I controlled it all.

      Lastly, most of the dividend ETFs (XDV, VDY) hold the same companies. The banks, the telcos, the energy companies out West and utility companies. Those companies rarely change over time. I figured it made sense to buy what the big funds own myself 🙂

      The top-10 holdings of XDV, I own almost all of them. I own the top-25 holdings of XDV with only a handful of exceptions. Here is a post why I don’t buy dividend ETFs anymore:

      http://www.myownadvisor.ca/reader-question-why-dont-you-just-buy-dividend-etfs/

      Thanks for asking the tough question!
      Mark

      Reply
  3. I own CDZ but I find their criteria for the dividend ‘aristocrats’ a bit misleading. I’d expect to see blue-chip, solid companies with a very long history of paying dividends. Instead I think the criteria focuses more on yield and increases

    Reply
    1. Same Dan, I find CDZ a bit confusing and their criteria odd when you think about it…. I mean, no BMO or NA and bank stocks in general have been roaring for the last few years. Overall, a good product but it’s not for everyone.

      You probably already know I like to own stocks directly for dividend income. I figure I’m better off with that vs. a financial product where I can and where it makes sense.

      Reply
      1. CDZ drives me nuts. Confusing criteria as per the above comments and most of the holdings I would never pick. But the dang thing has diversification with non-typical holdings it seems to get strong/consistent results. I find myself often re-evaluating holding CDZ but cannot seem to break away when I look at the data.

        Reply
        1. I wouldn’t hold some of those stocks myself Doug. Examples include AGF, EIF, TCL and more. That said, CDZ is still a good product for many income-oriented investors who don’t want to own dividend stocks directly because of the higher risks they entail. You need a good chunk of change to hold 65 stocks (that CDZ holds) directly in your portfolio. Have you looked at ZDV? Yield is good for half the fee and more blue-chip stocks although tipped in the energy favour.

          Reply
          1. Yes I have Mark, in fact it was your blog and the great information from the comments here that got me re-evaluating my choice of dividend ETF’s. I am already part was through switching from CDZ to ZDV as one of my key dividend ETF’s. I feel ZDV fits better with my overall investing strategy and as you point out, ZDV has an overall strong value between low MER, high Yield, quality holdings..etc. Although CDZ has done me well and produced solid consistent returns, I am not comfortable anymore with the holdings and higher MER.

          2. Well, glad it’s causing you to think Doug, this is what the blog is about. 🙂

            Although all financial decisions are your own, as you know by now, money management fees matter. I think keeping CDZ, while good, there are better products on the market. ZDV is one of my favourites but in the dividend ETF landscape, overall, these are all decent choices: ZDV, VDY, DXM, XDV, and CDZ included.

            Better off paying 0.60% for a dividend income oriented ETF than 2%+ in a mutual fund, no? 🙂

            Thanks for reading the site, happy to hear from all readers. I learn from you guys as well.
            Mark

  4. Thanks for the recommendations, looking into ZDV now…

    I don’t like how the monthly distributions have decreased for a year now… that’s the opposite of what I like to see! (and no dividend cyclical reason that I can see)

    2013 Jan – Aug: $0.07
    2013 Sept – Dec: $0.068
    2014 Jan – Feb: $0.065
    2014 Mar – May: $0.062

    Any idea why? I’ll do more research.

    Reply
    1. Thanks for your question Adam…my understanding is this…

      When an ETF has cash inflow or cash outflows it changes the distributions per unit (that you quoted). When people buy, the price goes up and there is a drop in distributions per unit because of fund inflows. I suspect if the Net Asset Value (NAV) is higher in Mar 2014 than Jan 2013, which is likely, this is the case.

      I would need to confirm this with BMO though.

      Reply
      1. Thanks for your reply, Mark.

        I’ll admit I don’t know as much as I probably should about how ETFs work behind the scenes.
        As a ‘simple-minded’ investor the way I see is the # of shares (or units) doesn’t change in my portfolio based on the ETFs inflow/outflow, so in reality a drop in the distributions per unit translates directly into a drop in cash that I can reinvest.
        What I may (or may not) be missing is the decrease in distributions is correlated to an increase in the unit price..?… rather than a drop in distributions from the underlying ETF holdings.

        Reply
        1. Hey Adam,

          Based on my call to BMO, I called them, Client Services told me:

          1. the ETF distributions for ZDV can change based on the ETF purchases (and sales) by investors, meaning, how much money goes into and out of the ETF; changing its Net Asset Value (NAV) but also,
          2. the ETF distributions change on a quarterly basis for this ETF, subject to what the fund managers decide the ETF distribution should be. The fund managers may react or forecast to market conditions, paying out more (or less) distributions in any quarter. These distributions may change without any prior notice to individual investors throughout the year.
          3. Yes, the decrease in distributions (for ZDV) could occur based on decreased dividends from the ETF holdings (e.g., BCE pays less in dividends) but that is not nearly as likely across all ETF holdings to change the distributions of the ETF as items #1 and #2 above.

          Hope that information helps.
          Mark

          Reply
          1. Wow, that information does indeed help! Thanks for putting in the time to call.

            Clearly I was wrong in my assumption that ETF distributions = all dividends paid from underlying holdings, per unit, for that time period. (why would it be that simple, right?? 🙂 )

            I like that this ETF has a yield north of 4%, so I’d still consider it in my ‘hit list’ (thanks for the recommendation), but I feel their distribution history speaks volumes to me and should be watched closely.

          2. No worries, it was a quick call. It was good for me to find out and confirm things as well.

            Remember though yield isn’t everything, it’s really total return that matters. If you can get 4% yield and some capital appreciation, then that’s great. On that note, broad market equity ETFs almost have the inverse, some yield with more capital appreciation….so stay tuned for my post next week (?) about my top Canadian Equity ETFs.

            Cheers!

  5. Hi Mark,

    A bit late to this post, busy at work found a minute to write here.

    If I take XDV and a lay it over ZDV in Google finance’s comparison chart stock screener, does XDV not give you a substantially better return over the past 5+ years? I remember when I purchased it I compared 3 similar etf’s and felt XDV was the better choice.

    Secondly I was researching looking for a stable ETF that I could park cash in and get a dividend return while I waited for other securities to become a better value. I did some searches and came across CPD. Could you give me an opinion of this ETF? It started with a value of $20.00 in 2007, lost 30% of its value in the crash, recovered to $18.00 then dropped to $16.00 range. It seems to have very little price fluctuation week to week. Just these 2 unnerving share price drops. Along the way it has a nice 4.5% payout, paid monthly. Do you feel this is an ETF one could find a “relatively” safe way to make a decent return?

    Reply
    1. Hey Paul,

      XDV, 3-years as of April 30, 2014 returns = 9.43%
      ZDV, 2-years as of April 30, 2014 returns = 10.73%.

      Not really a fair comparison I know since ZDV has only been around for a couple years since October 2011.

      XDV has been a solid performer overall, since inception, December 2005 almost 7%.

      CPD, that’s the preferred share ETF?

      Monthly payout and consistent yield over 4% I recall, that’s steady. I think this ETF tracks the S&P/TSX Preferred Share Index which is the largest of the bunch. There is also ZPR to consider. The MER for ZPR is lower than CPD which might interest you. It yields over 4%. If you want a steady payout over 4%, and paid monthly, probably not a bad play with either but I wouldn’t expect much if any price appreciation for these ETFs. Preferred shares, on their own, pay you like a bond but have equity-risk.

      Mark

      Reply
      1. Thanks for your thoughts.

        Going through your above replies here XEI does sound like an ETF worth a little more consideration as well. I like your replies. You explain yourself clearly without getting overly technical.

        Reply
  6. Currently my Canadian exposure is limited to XIC… If one was to include XEI in their portfolio, would you suggest the percentage of XIC be lowered to do this?

    As you commented above, XEI seems like a very good canadian ETF that pays a high yield. So if my canadian exposure allocated 25%, would you suggest lowering XIC exposure to include XEI so I can maintain the 25% canadian exposure?

    Or is it simply easier to just treat XEI as a dividend paying ETF and not worry too much how it fits into my diversified portfolio?

    Reply
    1. I think XEI is a good product but you’re going to get little capital appreciation with XEI, or less so with XEI compared to XIC I think.

      All dividend-focused or income-focused ETFs in Canada have some sector biases such as banks and energy companies, so as they go, so do the returns of XEI. XIC is much more balanced.

      If your Canadian exposure allocated is 25%, and you want to Couch Potato but want a bit more income, I would be inclined to have a small percentage of XEI but a greater percentage of XIC as part of your 25%.

      That’s just me though 🙂

      Reply
  7. Looking at some of your picks now and from the past in Canadian ETFs – CDZ, CRQ (which I actually own but want to change up), XDV, XEI, XIU and ZDV.

    Interestingly, ZDV – your top pick, has its top holding VSN – which if I look at http://www.ca.dividendinvestor.com/?symbol=vsn&submit=GO appears to have a 400% payout ratio (i.e. that dividend can’t be sustainable or some data is wrong somewhere or this is a blip?).

    If I download their holdings and sum by sector, and then consider Financials + Energy + Materials (which is, I believe you make the point, the majority of the TSX), I get in descending order:

    CRQ – 76.2%
    XEI – 73.0%
    ZDV – 69.0%
    XDV – 67.7%
    CDZ – 38.9%

    The first 4 are tightly clustered and CDZ is clearly the outlier. From a diversification point of view, wouldn’t one decent strategy to pick one of the top 4 (find a lower MER than CRQ) for half and CDZ for the other half? One might think that the higher MER Is justified in order to have diversification in “dividend aristocrats” which doesn’t reflect the profile of the TSX per se? Just a thought…

    Reply
    1. I think you’re right about VSN Larry, the payout ratio is crazy high…which is not good if you own it individually since it’s on the verge of a dividend haircut, or should be I think.

      Yes, dividend stocks in Canada are largely from financial, energy and materials sectors and they make up a good portion of the TSX as well.

      In terms of what to pick and own from these choices, I think it would be prudent to invest in a dividend ETF in addition to other ETFs. I think it could be a poor play to only invest in a dividend ETF alone. A pairing with a broader-base ETF like XIC or VCN might be appropriate from Canada, in addition to some U.S. and international equity content such as VTI:US and VXUS:US respectively.

      I didn’t mean to suggest investing in only a dividend ETF is good enough rather if you don’t want to own individual Canadian stocks but want some higher yield, then a dividend ETF is a consideration. Disclosure: I used to own XDV but I don’t own it anymore.

      As you likely know by now, higher MERs are rarely justified.

      Thanks for the detailed comment.

      Reply
      1. Thanks for the considered reply, Mark. Right. I do own a number of individual stocks (mainly US exchanges within RRSP), but to replicate the list is prohibitive. So in my own case I divide more or less down the middle for my equity stuff – half funds and half stocks. For the funds, I have international, US and Canada. I’m thinking specifically about Canada, and thinking that for the funds portion, a prudent course to divest the MER-heavy CRQ might be half XDV or XIU, half admittedly MER-heavy CDZ with the idea that there’s value attached to that MER, but not to just duplicating the TSX or similar (with XDV 0.50%MER or XIU 0.17%MER and virtually indistinguishable from CRQ in performance, or as you mention above, XIC with as it happens 59.5% Fin/Energy/Mat’ls and 0.05%MER – very stingy indeed or VCN (wow.. 247 holdings? that’s diversified!) with various references for MER, all low). So split CRQ in half and get CDZ 50% and XIC (for argument’s sake) 50%. Is that the sort of thing you’re suggesting?

        Reply
        1. You read my mind Larry, if you mean to replicate an index or a dividend ETF, then yes, that is very cost prohibitive especially with a small portfolio.

          My experience is I have found capital gains and yield are often two-sides of the same coin. Meaning, if you want capital appreciation, you have to accept lower-yields, hug the indexes and you are consequently taking on less risk. This is a good thing when it comes to investing but it forces investors to be more patient and lazy. Again, good things for investors to be.

          On the other side, if you want more yield, you have to accept more risk, choose individual dividend stocks or ETFs that are focused on yield (i.e., dividend ETFs or sector ETFs), and have less diversification because of it.

          I see things as a trade-off but in the end, it’s total return (cap. gains and yield) that matters.

          So, where does that leave us?

          Again, this is not investing advice, I don’t know your situation well enough and thus cannot advise of anything, but if you are seeking to divest of MER-heavy CRQ, solutions depending on your objectives could be:

          -avoid dividend ETFs, go with broader-market CDN ETFs like XIU, XIC, VCN and accept lower yield.
          -split your CDN equity with 50% yield-hungry ETF and 50% indexed ETF.
          -accept a lower cost CDN dividend ETF.

          Personally, I tend to own CDN and US dividend stocks and CDN and US indexed ETFs, so I’m in the second choice above. This might not work for other investors based on their investing objectives and risk profile.

          Reply
  8. Hi Mark
    Wondering your thoughts now? I want to invest in 2 Canadian Dividend ETF’s with different holdings. I think CDZ is interesting and worth the .66 mer For the other 50% I am stuck between XDV, VDY and XEI.
    Any thoughts?

    Reply
    1. Hi Again Chuck. Here is a post about dividend paying ETFs:
      http://www.myownadvisor.ca/top-canadian-dividend-etfs-portfolio/

      I focused on XEI here:
      http://www.myownadvisor.ca/top-canadian-equity-etfs-portfolio/

      I can’t really recommend what you should buy for many reasons on this site but I think the key is, whatever you buy, stick with it. Keep your investing costs low and be as diversified as possible. This likely rules out CDZ in my book. A decent product but not the best.

      Reply

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