Top Dividend ETFs – Get Cash for Life

Top Dividend ETFs – Get Cash for Life

Cash for life from dividend ETFs? Is that possible?

Very possible friends! Read on to learn how and why.

Why Dividends?

In a couple of words: cash flow.

I would argue nothing makes investors consider dividend ETFs more than cash flow. Or, maybe like rock-bottom interest rates. When it comes to interest rates, well, they are very low. They are predicted to remain low. I personally don’t think they are going to go up anytime soon…

But you don’t need to take my word for it on interest rates. 

You can heed the caution from a highly respected actuary about the massive demographic shifts now fully underway. Author and actuary Fred Vettese has been quoted as saying:

“Low interest rates and low inflation are here to stay.”

How are you going to battle low rates and higher inflation??

With low rates and likely higher inflation over time, for my generation (GenX) and likely the next generation of investors, you must consider going with one or more of the following to fund your retirement thanks to low interest rates triggered by Boomer demographic shifts:

1. Save more; invest in a higher % of equities.
2. Work longer.
3. Spend less.
4. Any combination of #1, #2 or #3 above.

You can find a couple of great books from Fred, and my reviews about them, via the links below:

Get your Essential Retirement Guide here.

Find out how you can generate Retirement Income for Life in this post.

Are there optimal ways to draw down assets?

I believe so.

Back to Vettese, over the years, he has put himself on record saying two or more of these methods below will help you fight longevity risk AND promote a structured approach to asset decumulation:

1. Invest in passively managed funds to lower your investment costs and fees over time – keeping more of money working for you (versus in the hands of greedy advisors).
2. Defer your Canada Pension Plan (CPP) later in life – something I wrote about here.
3. Use some (not all), maybe between 25-50% or so of your RRIF assets to purchase a non-indexed annuity. Read up about how to manage your RRIF in this post here.
4. Make adjustments to your spending habits. In “good markets”, spend more. In “bad times”, spend less. That means you need to consider from Variable Percentage Withdrawals (VPWs).
5. Consider Fred’s “nuclear” option of using a reverse mortgage, later in life. (I personally wouldn’t do that but to each their own!)

Portfolio drawdown orders to consider

Depending on when you plan to retire or semi-retire like I might, the tax consequences involved, and much more, you can probably appreciate the drawdown order could be very different between retirees.

Here are some key ideas/sequences to consider:

1. Non-registered (N), RRSPs (R), TFSAs (T) (NRT)

This sequence might work well if you have built up a modest taxable account value by your 50s or 60s and you might have higher income needs and wants in retirement. To fight longevity risk, you can exhaust your non-registered account first, allowing tax-deferred money (RRSP) and tax-free investments (TFSA) to grow and compound away. “NRT” might work well to fight longevity risk, may apply to those retirees with any workplace pensions to draw from, and help those investors who wish to defer Canada Pension Plan (CPP) and/or Old Age Security (OAS) benefits until a maximum age. 

More reading: When to take your CPP benefit

2. Non-registered (N), TFSAs (T), RRSPs (R) (NTR)

Also in this sequence, you can consider tapping your taxable account first but reverse the order between TFSAs and RRSPs – keeping RRSP assets “until the end”. The benefit of this approach is you have some long-term income splitting opportunities, while money continues to compound tax-deferred. (If you are the recipient of a pension and are 65 or older, you may split income from your RRSP, RRIF, life annuity, and other qualifying payments.) The challenge however for some retirees is by keeping RRSP/RRIF assets preserved well into their 70s and 80s, these seniors could be subject to OAS clawbacks depending on their income level. Recall OAS is an inflation-protected government benefit that few retirees want clawed back! More on that in bit!

More reading:

RRSP withdrawal strategies before age 71.

What is OAS and how to avoid OAS clawback?

Of course beyond these sequential orders there can be a myriad of drawdown tactics that can be used to balance short-term and long-term tax efficiency needs, optimize retirement income, let alone fulfill any wealth transfer desires:

• RRSPs (R), Non-registered (N), then TFSAs (RNT) – usually done to minimize taxation and to minimize OAS clawbacks given very healthy portfolio values. 
• Blended withdrawals – some blends of NRT, NTR, or RNT. 
• Custom withdrawals – based on tax bracket management in the “go-go” retirement years vs. “slow-go” years which includes some strategic RRSP withdrawals when minimal other income streams are in play.
• And more and more….

The punchline is: you will need dependable income from your portfolio to retire unless you want to work. 

What on earth are you going to do?  

Get Cash for Life

Inspired by the following past emails from readers (adapted for the site post below), I think you can earn cash for life from a simple 3-fund dividend-oriented ETF portfolio. That is one way to earn income from your portoflio. 

 

Hi Mark,

I thought I saw you write recently about various ETFs but I was unfamiliar with one of them – which made me pause and think, geez, that’s a great idea!

I believe it was a U.S.-listed dividend ETF that invests in U.S. dividend aristocrats (NOBL?) Do you remember that ETF? Do you think that ETF is a good for my RRSP? 

The reason I ask is I recently sold a U.S. dividend stalwart and I’m thinking it would be much easier to get solid income from a U.S dividend ETF without the individual stock risk.

Thanks very much!

 

Hi Mark,

Love your site and how you are chronicling your journey to financial independence. Loved your six phases to financial independence – FI post!

In doing more thinking about how I need income from my portfolio to live from, I’m wondering if there is a dividend portfolio you’d recommend? Should I consider investing in some dividend ETFs for cash flow? Thoughts?

I hope you post my questions!

 

I will 🙂

I just love these types of questions. Why? Because these astute readers are wondering about low-cost ETFs, dividend-income ETFs and portfolio simplification – all things I’m very passionate about for my own portfolio too.

Why dividend ETFs?

While the broad market indexed ETFs are indeed great, a dividend ETF can offer investors something a bit different: income today and growth over time. 

As you well know companies use dividends to pass on their profits directly to shareholders. They certainly don’t have to but many companies do – instead of buying back shares, just focusing on capital gains, paying down any debt, reinvesting profits back into the business or even still, seeking out mergers and acquisitions.

These are important concepts to understand since dividends are just one (important) part of an investors’ total return. Just because a company pays a dividend doesn’t necessarily make it superior – although the income is great. Therefore, the desired goal for many dividend ETFs on the marketplace, and investors that invest in them, is to deliver meaningful income when investing in dividend-paying common stocks, preferred stocks, or real estate investment trusts (REITs).

Overall, dividend ETFs may be considered for risk-averse investors who are looking for income from their portfolio – since dividend ETFs may or may not keep up with any indexed fund returns over time. So, investors approaching retirement or investors now into retirement may decide they don’t need market-like returns. Instead, they are more focused on the meaningful, largely stable income that can be delivered from their portfolio.

This makes dividend ETFs appealing to many investors, including for a portion of any portfolio, when investors don’t want to deal with any stock selection but desire income. Many well-constructed dividend ETFs will save you the time and effort you would otherwise spend on researching individual stocks. Instead of doing that work, you have built-in diversification via the dividend ETF.

So, the punchline is: if you are seeking primarily income from your portfolio and some growth over time then dividend ETFs can be a great consideration.

Ultimately, because total return matters, most investors have a slight bias to broad market indexed ETFs.

I happen to own some broad market ETFs myself. You can read about some of my favourites here.

ETFs

Dividend ETFs can be beneficial for these key reasons:

1. You don’t want to build your own ETF per se of stocks. So, you can obtain dividend stock diversity without taking on individual dividend stock risk.
2. Although distributions might not grow as fast as the dividend increases from the individual stocks themselves, you can expect the ETF distributions to grow with time. That is the hope of course. 
3. You should be able to obtain your diversification and income needs via low fees. This way, you are not padding the pockets of any financial advisors to manage your money. 
4. There are tax-advantages in taxable accounts thanks to our Canadian dividend tax credit, based on *Canadian fund construction only.

*This the tax treatment of Canadian dividend paying stocks (and ETFs too)!

Of course, any investor could technically create their own dividend income stream by timing the sale of their stock shares. 

Best dividend ETFs for income

Let’s get into it!

1. Canadian Dividend ETFs

Here are some of my Canadian favourites:

1. Horizons Active CDN Dividend ETF (HAL)
2. iShares S&P/TSX Composite High Dividend Index ETF (XEI)
3. iShares Canada Select Dividend Index ETF (XDV)
4. BMO Canada Dividend ETF (ZDV)
5. iShares S&P/TSX Canadian Dividend Aristocrats Index Fund (CDZ)
6. Vanguard Canada FTSE Canadian High Dividend Yield Index ETF (VDY)
7. iShares S&P/TSX 60 Index ETF (XIU)

ETF Symbol	MER	# of holdings	5-Year Return	10-Year Return
HAL	0.67%	Not readily available	9.29%	8.97%
XEI	0.22%	75	8.14%	7.14%
XDV	0.55%	29	10.19%	8.35%
ZDV	0.39%	51	8.36%	N/A
CDZ	0.66%	86	9.24%	8.31%
VDY	0.21%	39	10.17%	N/A
XIU	0.18%	60	10.93%	8.52%

Returns as posted as of end of August 31, 2021

Best Canadian Dividend ETF for income?

If I absolutely HAD to pick one, I’d go with XIU.

(Disclosure:  I used to own XIU until I built my own Canadian dividend ETF).

I would own XIU because you get the top-60 stocks in Canada, the bluest-blue-chippers by market capitalization in Canada, steady distribution income, rising distributions over time and low-cost. Your cash for life would be spending roughly 3% yield from XIU without any need to touch the capital – until you want to. 

2. U.S. Dividend ETFs

Here are some of the best U.S.-listed Dividend ETFs to own:

1. Vanguard High Dividend Yield ETF (VYM)
2. Vanguard Dividend Appreciation ETF (VIG)
3. iShares Core Dividend Growth ETF (DGRO)
4. iShares Core High Dividend ETF (HDV)
5. Schwab U.S Dividend Equity ETF (SCHD)
6. State Street SPDR Portfolio S&P 500 High Dividend ETF (SPYD)
7. ProShares S&P 500 Dividend Aristocrats ETF (NOBL)

All information below is current at the time of this post – quick comparison format:

ETF Symbol	MER	# of holdings	5-Year Return	10-Year Return
VYM	0.06%	412	10.93%	13.35%
VIG	0.06%	247	15.04%	14.49%
DGRO	0.08%	389	15.40%	n/a
HDV	0.08%	75	6.83%	10.42%
SCHD	0.06%	102	16.36%	n/a
SPYD	0.07%	79	7.88%	n/a
NOBL	0.35%	65	13.69%	n/a

Should you wish to avoid any Canadian-dollar to U.S.-dollar currency conversions work with Norbert’s Gambit, there are also some Canadian-listed U.S. Dividend ETFs to consider:

1. iShares US Dividend Growers Index ETF (CAD-Hedged) (CUD)
2. Vanguard U.S. Dividend Appreciation Index ETF (CAD-Hedged) (VGH)
3. BMO US Dividend ETF (ZDY)

Using VYM, just as an example from the ones above, your cash for life thanks to owning VYM would be about 3% yield from the ETF distributions. 

3. International Dividend ETFs

Here are some of the best U.S.-listed, international dividend ETFs to own:

1. Vanguard International High Dividend Yield ETF (VYMI)
2. Vanguard International Dividend Appreciation ETF (VIGI)
3. iShares International Select Dividend ETF (IDV)
4. State Street SPDR S&P International Dividend ETF (DWX)

Using VYMI, just as an example from the ones above, your cash for life thanks to owning VYMI would be spending close to 4% from the ETF distributions alone.

Hypothetical dividend ETF income portfolio

Assuming you worked hard, saved well, and had $500,000 in your retirement nest egg to approach semi-retirement or full-on retirement with, you should be able to earn (and spend) at least $16,500 as cash for life from your portfolio – if you just spend the ETF distributions alone.

Of course, a few things to mention:

1. This 40% Canadian + 30% U.S. + 30% international split is just an example. You may want to consider lowering your Canadian bias and owning more U.S. assets as an example.
2. I believe any responsible investor (who doesn’t want to leave a huge legacy) should strategically sell dividend ETF units over time since by owning such ETFs above, you should also expect to achieve some portfolio growth. Your responsible draw down plan will include incorporating any asset decumulation approaches Vettese recommends above and more.
3. Finally, you might want to consider with any heavy equity approach (i.e., over 70% or 80% in retirement) the use of a cash wedge. 

The Cash Wedge – Managing market volatility

Top Dividend ETFs – Get Cash for Life summary

History continues to tell us that dividend-paying companies have historically outperformed their non-dividend paying rivals. Will history prove to be the norm going forward? Time will tell!

I do know that, as an investor, owning my basket of Canadian and U.S. dividend stocks directly (along with my low-cost ETFs) helps me stick to an investing plan I believe in.

I you are not comfortable with individual stock selection, but desire income from your portfolio, then dividend ETFs can be an option for you. With up to three dividend ETFs that cover companies, countries and continents around the world, you can generate passive income from your portfolio – an opportunity to live off dividends or distributions to some degree – with less individual stock risk for a very low fee. 

What are your plans to earn income from your portfolio during retirement? Have you considered dividend ETFs like these for your portfolio? Let me know!

Further Reading:

How to generate retirement income.

Spend more or retire earlier in this bulletproof retirement plan.

How I built my own dividend income portfolio.