For the average Canadian investor, market volatility in the wake of the COVID-19 pandemic has been unnerving. Major stock market plunges in Spring 2020 were followed by some individual stocks surging, while other stocks continued to lag. Since then, the North American markets have been on the up-and-up, surging in the first six months of 2021. Any way you slice it, it can be unpredictable — especially in the wake of a once-in-a-generation pandemic.
There are alternatives to riding the individual stock rollercoaster. One of those options is exchange-traded funds (ETFs). ETFs are collections of securities traded as one entity on the stock market. These are listed on stock exchanges, and trade daily like individual stocks. ETFs incorporate investments across multiple sectors, so they’re not typically as volatile as individual stock picks. There are also many sector-specific ETFs, which can help you better navigate highs and lows.
What are dividend ETFs?
A dividend ETF is an exchange-traded fund that is designed for investment in a selection of high-dividend paying stocks. (Investopedia has a great explainer on dividend yields) Typically, these ETFs track a specific index that is screened to include blue-chip type companies — recognized, well-established companies that are financially sound and considered lower risk. As well, this type of ETF favors companies that have a history of strong dividend increases over time.
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The goal for dividend ETFs is to achieve high yields when investing in high dividend-paying common stocks, preferred stocks, or real estate investment trusts (REITs).
Should I invest in dividend ETFs?
Whether dividend ETFs are right for you depends on where you are in your lifespan and your goals.
Overall, dividend ETFs are generally recommended for risk-averse investors who are looking to produce some income. For starters, investors approaching retirement or who are already retired are typically looking for high yields in their portfolios. Dividend ETFs can help sustain their lifestyle when no longer working.
For investors hoping to keep more of their hard-earned money in their pockets, ETFs are certainly attractive. First, expense ratios are lower for ETFs than the average mutual fund. Second, a good dividend ETF choice can save the time and effort you might have spent on researching individual stocks, with much better diversification baked in.
If you’re looking to make a quick profit going in and out of the market, dividend ETFs are not for you. However, if you want a reasonably reliable investment that should produce dividend income, you are a good candidate for one or more of our picks for best dividend ETFs.
Are dividend ETFs a good investment?
For starters, it’s important to do some homework yourself or to work with a reputable advisor when selecting the dividend-paying ETFs that are right for you. Importantly, there are no guarantees of future performance. Selecting ETFs that have good sector diversification, have demonstrated strong past results, and have reasonable fees can help you choose wisely.
Bank ETFs that focus specifically on the financial sector represent one of the ‘blue-chip’ types of ETFs that can provide stability. In fact, Canadian dividend ETFs typically hold significant financial stocks, given that the financial industry represents 28.6% of the TSX Index.
As well, how you choose the best dividend ETF for you will also depend on market conditions and your investment timeline.
To compare performance, it’s important to look at not only dividends produced but also management fees – MER fees – which can vary between funds.
What is a Canadian ETF Screener?
The best way to decide which ETF is a good investment, and to get an overall view of performance, is with an ETF screener. Using a screener helps you compare and review the current and average performance of different ETFs. You can filter and narrow down your ETF options based on your criteria of interest.
What is the best Canadian ETF for dividends?
We’ve selected five funds that stand out as being the best Canadian ETFs for dividends. They are:
- Horizons Active CDN Dividend ETF (TSX:HAL)
- iShares S&P/TSX Composite High Dividend Index ETF (TSX:XEI)
- iShares Canada Select Dividend Index ETF (TSX:XDV)
- BMO Canada Dividend ETF (TSX:ZDV)
- iShares S&P/TSX Canadian Dividend Aristocrats Index Fund (TSX:CDZ)
Horizons Active CDN Dividend ETF (TSX:HAL)
Of the five ETFs selected, Horizons Active CDN Dividend ETF is smaller and lesser-known, with current net assets of $89.8 million (as at July 5, 2021). The stated investment objective of HAL is to seek long-term total returns consisting of regular dividend income and modest long-term capital growth.
This ETF invests primarily in equity securities of major North American companies with above-average dividend yields, with just over 96% of its holdings allocated to Canada (as at June 30, 2021). The fund’s risk profile is moderate, and MER fees are 0.67% (as at December 31, 2020). HAL has an estimated annualized yield of 3.18% paid out quarterly (record date: June 30, 2021).
As a result, HAL is highly diversified across a wide variety of companies and industry sectors. The top-weighted sector (as at June 30, 2021) is Energy at 28.94%, with Financials comprising 20.31% of holdings, and Industrials 18.50%. In addition, mid-range percentage securities include real estate, utilities, and materials.
Here are the top 10 holdings as at May 31, 2021, in the Horizons Active CDN Dividend ETF:
|Security Name||Sector||Weight (%)|
|ROYAL BANK OF CANADA||Financials||4.87%|
|THE TORONTO-DOMINION BANK||Financials||4.16%|
|BANK OF NOVA SCOTIA||Financials||3.67%|
|TOURMALINE OIL CORP||Energy||3.53%|
|IMPERIAL OIL LTD||Energy||3.48%|
|TFI INTERNATIONAL INC.||Industrials||3.15%|
|GRANITE REAL ESTATE INVESTMENT TRUST SHS OF GRANITE REAL ESTATE INC + 1 TU||Real Estate||3.64%|
|TMX GROUP LTD||Investment Brokerages||2.79%|
iShares S&P/TSX Composite High Dividend Index ETF (TSX:XEI)
iShares S&P/TSX Composite High Dividend Index ETF strives to replicate the performance of the S&P/TSX Composite High Dividend Index. The fund is managed by BlackRock Asset Management Canada Limited. This fund has long-term growth goals, investing in Canadian companies operating across various sectors. It has a risk rating of medium and is designed to be a long-term foundational holding.
This high-yield ETF pays out its dividend monthly and at 0.22%, has one of the lowest MER fees. It has $1.13 billion in assets (as at July 5, 2021), and has an annual distribution yield of 3.79% (as at July 2, 2021).
XEI has a high concentration in the financial and energy sectors — 29.96% and 29.83%, respectively (as at July 5, 2021) — and 75 holdings (as at July 2, 2021). While there are strong performing blue-chip stocks within the ETF, XEI offers less diversification than some of the other leading ETFs. As a result, if you have a longer-term investment horizon, this ETF has potential for growth based on high-yield dividend stocks.
Here are the top holdings in the iShares S&P/TSX Composite High Dividend Index ETF as at July 2, 2021:
|Security Name||Sector||Weight (%)|
|ROYAL BANK OF CANADA||Financials||5.06|
|CANADIAN NATURAL RESOURCES LTD||Energy||5.03|
|SUNCOR ENERGY INC||Energy||4.90|
|TC ENERGY CORP||Energy||4.81|
|BANK OF NOVA SCOTIA||Financials||4.76|
|BANK OF MONTREAL||Financials||3.98|
iShares Canadian Select Dividend Index ETF (TSX:XDV)
iShares Canadian Select Dividend Index ETF seeks to replicate the performance of the Dow Jones Canada Select Dividend Index. This dividend ETF is also managed by BlackRock Asset Management Canada Limited. Its goal is to create long-term capital growth by investing in 30 high-yielding Canadian companies in the Dow Jones Canada Total Market Index. XDV offers a large exposure to the financial sector and pays a monthly dividend income.
The fund is the largest ETF on our list with a net asset value of $1.7 billion (as at July 5, 2021). It has MER fees of 0.55% and has an annual distribution yield of 3.86% (as at July 5, 2021).
XDV has a proven track record as a top performer, and it carries a medium-risk ranking. The Financial Services sector is heavily weighted in its portfolio (53.73% as at July 5, 2021), with strong representation from Canada’s ‘Big Banks’. In smaller percentages, the fund includes investments in Communications Services and Utilities among its 29 holdings (as at July 2, 2021).
Ultimately, for those wanting the chance for higher dividend returns weighed against a slightly higher risk factor given the concentration in sectors, this fund may be a good fit.
Top 10 holdings in the iShares Canadian Select Dividend Index ETF as at July 2, 2021, include:
|Security Name||Sector||Weight (%)|
|CANADIAN IMPERIAL BANK OF COMMERCE||Financials||8.47|
|CANADIAN TIRE LTD CLASS A||Consumer Discretionary||6.71|
|LABRADOR IRON ORE ROYALTY CORP||Materials||6.26|
|BANK OF MONTREAL||Financials||6.25|
|ROYAL BANK OF CANADA||Financials||6.00|
|TC ENERGY CORP||Energy||4.72|
|BANK OF NOVA SCOTIA||Financials||4.71|
|NATIONAL BANK OF CANADA||Financials||3.91|
BMO Canadian Dividend ETF (TSX:ZDV)
BMO’s ZDV fund, with net assets of $688.62 million (as at July 5, 2021), will suit investors with slightly higher risk tolerance. This fund focuses on dividend yield, targeting companies with top dividend payouts and those with the potential for long-term capital appreciation. The ETF is designed for investors looking for both income and growth in their portfolios.
This fund is diversified, but primarily holds stocks from the financial and energy sectors among its top six securities. Stocks included in the ETF are assessed based on their three-year dividend growth rate, yield, and payout ratio.
The ZDV ETF pays monthly dividends, has MER fees of 0.39%, and an annualized distribution yield of 4.13% (as at June 25, 2021)
The top 10 funds held in this ETF as of July 13, 2021 include:
|ROYAL BANK OF CANADA||Financial||5.01|
|BANK OF NOVA SCOTIA||Financial||4.93|
|CANADIAN IMPERIAL BANK OF COMMERCE||Financial||4.69|
|BANK OF MONTREAL||Financial||3.91|
|CANADIAN NATIONAL RAILWAY CO||Industrials||3.90|
|TC ENERGY CORP||Energy||3.90|
iShares S&P/TSX Canadian Dividend Aristocrats Index Fund (TSX:CDZ)
The Canadian Dividend Aristocrats Index Fund, also managed by BlackRock Asset Management Canada, is one of the largest ETFs in the top five list, with net assets of $959 million (as at July 5, 2021) and 86 holdings (as at July 2, 2021). Curious about the use of ‘aristocrat’ in the name? It actually designates stocks that have a proven track record of raising their dividends for at least five consecutive years. The fund is considered a moderate risk level.
The investment objective of CDZ is to match the investment of the iShares S&P/TSX Canadian Dividend Aristocrats Index. As a result, it offers a portfolio of high-quality, dividend-paying Canadian companies operating across diversified sectors. As at July 5, 2021, the top three sectors represented are Financials (28.55%), Energy (16.18%), and Industrials (11.64%).
The fund has MER fees of 0.66%, has a monthly distribution frequency, and has a 3.25% distribution yield (as at July 5, 2021).
The top 10 holdings in the Aristocrats Index Fund as of July 2, 2021, are:
|SMART CENTRES RL ESTATE INVESTMENT||Real Estate||2.97|
|PEMBINA PIPELINE CORP||Energy||2.84|
|CANADIAN NATURAL RESOURCES LTD||Energy||2.46|
|POWER CORPORATION OF CANADA||Financials||2.34|
|FIERA CAPITAL CORP CLASS A||Financials||2.32|
|GREAT-WEST LIFECO INC||Financials||2.13|
|CANADIAN IMPERIAL BANK OF COMMERCE||Financials||2.08|
Investing during challenging times
We should note that given the impact of the coronavirus pandemic on the worldwide economy, the typical performance of many sectors and investment vehicles has been negatively impacted. High dividend-paying ETFs in Canada are no exception. Moreover, it’s important to look at the history of each ETF to get a full view of performance over time.
As a result, there are general formulas that have been touted to guide investors – such as having low-risk investments as a percentage of your portfolio equivalent to your age (for example 60 years of age = 60% non-risky holdings). Keep in mind, these rules of thumb may not be applicable in unpredictable economies.
At unprecedented times like these, it’s often prudent to consult a financial advisor regarding the best way forward. Your next steps will depend on assessing your tolerance for risk, your stage in life, and your investment preferences — among other factors.
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