ETFs and dividend stocks built to last for your portfolio
Almost as good as cookies and cream, I believe ETFs and dividend stocks can exist in harmony in your investment portfolio.
What are some of the best ETFs to build your portfolio with?
What are some dividend paying stocks to consider owning for growing income?
Read on and find out!
Why low-cost, diversified Exchange Traded Funds (ETFs)?
It’s easy to see the love affair with Exchange Traded Funds (ETFs). They can be a super cheap, low-cost way to passively invest in the market. With low-cost, diversified ETFs, you can also get what is considered to be “the only free lunch” that comes with investing – diversification. Nowadays, you can own thousands of stocks from around the world with just one ETF product.
From my point of view, I gravitate to equity ETFs pretty much exclusively in my portfolio because I believe going-forward, this asset class will continue to provide the best returns over a long period of time with the least amount of risk. Yes, absolutely, there are risks with owning equity ETFs. However, that risk comes in the form of short-term market volatility which is the price you pay for long-term growth.
Why dividend paying stocks?
It’s also easy to see the affinity to dividend paying stocks – I’ve owned a number of them for 11+ years.
While a high and a consistent total return is always a good goal when it comes to your portfolio, dividend paying stocks can offer equally high returns, tangible cash flow to investors and some capital appreciation as well. In fact, by owning dozens of established companies from different sectors that have a long history of paying consistent dividends, you can build a generous passive income machine. This passive income machine can also continue to grow thanks to routine dividend increases.
I continue to keep this dedicated Dividends page updated about my income journey to semi-retirement.
Are there ETFs and/or stocks that are built to last for your long-term portfolio?
I believe there are, and the list is here below!
ETFs built to last for your portfolio
If you’re going to be an equity investor, I don’t believe you can get rid of market volatility. Volatility is essentially the ride you need to take given investing risk and reward are related: the more investing risk you take on, the more potential reward.
You can however reduce some of the volatility that stocks will shove you way, using these guidelines, and why ETFs help:
- Consider dollar cost averaging when you buy stocks – although I believe making lump sum purchases are usually best.
- Diversify your equity investments – this is where ETFs can provide built-in diversification.
- As you diversify your holdings, keep a long-term investment timeline for your stocks. Think in years or decades (not months) as part of a long-term buy and hold and buy some more approach!
Without any further delays – beyond those all-in-one ETFs above – here are some of my favourite ETFs to buy and hold and buy some more of!
Best ETFs built to last for your portfolio
VTI in your RRSP*
The Vanguard Total Stock Market Exchange Traded Fund (VTI) invests in more than 3,000 U.S. stocks. While you cannot control what the U.S. stock market will do you can control your money management fees, and this ETF has industry-leading rock bottom costs. 10-year returns on this ETF at the time of this article are outstanding. See chart below.
I consider this ETF an excellent product for your U.S.-dollar RRSP.
Disclosure: I’ve owned VTI in our portfolio for about a decade now.
VXUS in your RRSP*
Own the world outside the U.S. economy with the Vanguard Total International Stock Exchange Traded Fund (VXUS). This product gives investors broad exposure to major stock markets around the world, ex-United States, with holdings from ~40%+ Europe, ~20% Emerging Markets, and ~30% Pacific Markets. You’ll own more than 5,000 stocks outside the U.S. with this product.
Not a fan of U.S.-listed ETFs to invest outside Canada? Consider these funds:
Vanguard All-World ex-Canada Index ETF (VXC)
iShares Core All Country World ex-Canada Index ETF (XAW)
With XAW in particular (I bought this ETF to increase my international diversification), I enjoy access to ex-Canada assets given a good portion of my taxable account and our TFSAs are only in Canadian dividend paying stocks.
*A reminder U.S.-listed ETFs (and stocks) held inside an RRSP escape withholding taxes of 15%. U.S.-listed ETFs like these trade in USD $$ so having a U.S. dollar RRSP minimizes foreign exchange charges and you can take advantage of currency fluctuations.
For Canadian-listed ETFs, if you don’t want to select Canadian dividend paying stocks like I do, to cover the Canadian market, I believe the following products should top your considerations for long-term growth:
- XIU or XIC (from iShares) or VCN (from Vanguard) or ZCN (from BMO) to name a few.
XIU in your RRSP or TFSA or taxable account
A great consideration for your portfolio is the iShares S&P/TSX 60 Index Fund (XIU). This Index is comprised of 60 of the largest (by market capitalization) and most liquid securities listed on the TSX. XIU is also very tax-friendly in a taxable account.
ETFs in a Model Portfolio
Of the above ETFs, I believe the best ones to put inside a TFSA are the Canadian-listed ETFs, including those like XAW that hold international assets. Yes, there will be foreign withholding taxes deducted but withholding taxes should not be the primary reason to drive asset holdings.
Here is a low-cost model portfolio to consider – a three-fund solution with some bonds for buffer:
|ETF||MER – TFSA||MER – RRSP||MER – Non-Reg|
|XAW||0.53% (0.22% + 0.31%*)||0.53% (0.22% + 0.31%*)||0.26% (0.22% + 0.04%*)|
*Shows the estimates of foreign distributions withheld based on the tax treaties associated with those countries the ETF invests in.
Here is another, more tax-efficient model portfolio to consider using U.S.-listed ETFs:
|ETF||MER – TFSA||MER – RRSP||MER – Non-Reg|
|VTI (US)||0.29% (0.03% + 0.26%*)||0.03%||0.03%|
|VXUS (US)||0.72% (0.09% + 0.63%*)||0.31% (0.09% + 0.22%*)||0.31% (0.09% + 0.22%*)|
*Foreign Withholding Taxes.
Are there individual stocks built to last? In my opinion, in Canada, yes.
Dividend stocks built to last for your portfolio
If you have investments in a non-registered account/taxable account as well as investments in RRSPs and TFSAs, I believe it could be best to hold the foreign investments in the registered accounts (RRSPs in particular) and keep those Canadian stocks that pay eligible dividends in the non-registered account.
This is what I do for my asset location. This way, I can also take advantage of the dividend tax credit while I earn that juicy dividend income.
What specific dividend stocks should you own?
There is no magic bullet when it comes to investing – owning ETFs and some selected stocks does not guarantee investing success. Your behaviour matters – a lot! Yet as part of a disciplined long-term investing approach, I do believe you can build tremendous wealth by following this path: owning a mix of ETFs and dividend paying stocks as a hybrid investor.
The following list of Canadian stocks could each make up 5% of your total non-registered portfolio or overall portfolio. I personally wouldn’t have too many stocks in my portfolio over 5% in portfolio value but your mileage may vary! I answered that question and posted it on my FAQs page.
I have highlighted these Canadian stocks because most pay a good dividend, they are established companies with built-in diversification (beyond Canadian borders) and when combined/collectively, they could also deliver a healthy growing income stream of cash beyond the returns of XIU, XIC, ZCN or a comparable Canadian-indexed ETF.
Meaning, you might even beat the Canadian index.
Disclosure: I own most of these Canadian stocks below:
- Bank of Montreal (BMO)
- Bank of Nova Scotia (BNS)
- TD (TD)
- CIBC (CM)
- Royal Bank (RY)
- National Bank (NA)
- Sun Life Financial (SLF)
- Manulife Financial (MFC)
- Enbridge (ENB)
- TC Energy (TRP)
- Fortis (FTS)
- Emera (EMA)
- Algonquin Power (AQN)
- Brookfield Infrastructure Partners (BIPC/BIP.UN)
- Brookfield Renewable Partners (BEPC/BEP.UN)
- Capital Power (CPX)
- Canadian Utilities (CU)
- Telus (T)
- Bell (BCE)
Other companies in other sectors:
- Nutrien (NTR)
- Canadian National Railway (CNR)
I believe there are many advantages of this hybrid approach – using Canadian dividend paying stocks and owning low-cost ETFs for extra diversification:
- minimal or no money management fees in the case of owning individual stocks.
- you can own the largest stocks in Canada (historically) and obtain built-in diversification.
- you can achieve additional diversification via ex-Canada ETFs.
- reduced volatility with stock diversification in some sectors like utilities.
- this harmonious buy and hold approach reduces panic-selling and reduces portfolio costs due to misbehaviour
- this approach is tax-efficient (i.e., hold Canadian dividend paying stocks in taxable account and low-cost ETFs including U.S.-listed ETFs inside RRSP).
- stocks can help protect against inflation.
- holding Canadian-listed ETFs avoids currency conversion charges or the need for Norbert’s Gambit. Alternatively, use the Gambit to buy your U.S.-listed ETFs like VTI periodically.
ETFs and dividend stocks built to last for your portfolio – how do I invest?
Established readers will know I own many of those Canadian stocks above and I own a few low-cost ETFs for extra diversification. Canadian stocks go in the taxable account for the most part. In our registered accounts, specifically our RRSPs, we are buying more low-cost ETFs over time. We’ll continue this investing approach as we strive for semi-retirement in a few years.
At the end of the day, I think if most investors can invest regularly, continue to keep their money management costs low, diversify, avoid tinkering with their investments, and hold more equities than bonds, chances are they will be rewarded many, many years from now.
Thanks for reading ETFs and dividend stocks built to last for your portfolio. I hope this information above helps your investment strategy too.