For the average Canadian investor, market volatility during 2021 has been unnerving. Major stock market plunges in the spring were followed by some individual stocks surging. Other stocks have continued to lag.
There are alternatives to riding the individual stock rollercoaster. One of those options is exchange-traded funds (ETFs) that include a collection of securities traded as one entity on the stock market. ETFs are listed on stock exchanges and ETF shares trade daily like individual stocks. However, because of incorporating investments across multiple sectors, ETFs are not typically as volatile as individual stock picks. You may want to consider investing in one of the best dividend ETFs in Canada for 2021 to meet your needs.
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. These ETFs typically track a specific index that is screened to include blue-chip type companies considered to be lower risk. They also favor 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.
Dividend ETFs are generally recommended for risk-averse investors who are looking to produce some income. Investors approaching retirement or who are already retired are 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 attractive. Expense ratios are lower for ETFs than the average mutual fund.
A good dividend ETF choice can also save the time and effort you might have spent on researching individual stocks, with much better diversification.
If you’re looking to make a quick profit going in and out of the market, dividend ETFs are not for you. But if you want a reasonably reliable investment that should produce dividend income, you are a good candidate for one or more of the best dividend ETFs in Canada in 2021.
Are dividend ETFs a good investment?
It’s important to do some homework yourself or to work with a reputable advisor to select the dividend-paying ETF that’s right for you. There are no guarantees of future performance. But 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 represents one of the ‘blue-chip’ types of ETFs that can provide stability. Canadian dividend ETFs typically hold significant financial stocks given that the financial industry makes up about one-third of the TSX Index.
Your choice of the best dividend ETF for you in Canada 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?
In an Advisorsavvy Blog published late last year, we advised Canadians that the best way to decide if an 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?
There are five dividend funds that stand out as being best Canadian ETFs for dividends. They are:
- Horizons Active CDN Dividend ETF (TSX:HAL)
- iShares Core S&P/TSX Composite High Dividend Index ETF (TSX:XEI)
- iShares Canada Select Dividend Index ETF (TSX:XDV)
- BMO Canada Dividend ETF (TSX:ZDV)
- 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 $57.3 million. The stated investment objective of HAL is to seek long-term total returns consisting of regular dividend income and modest long-term capital growth.
The ETF invests primarily in equity securities of major North American companies with above-average dividend yields, with just over 95% of holdings listed on the TSX. The risk profile of the fund is moderate and MER fees are 0.67%. The fund currently has an estimated annual yield of 4.32% paid out quarterly.
As a result, HAL is highly diversified with less reliance on the financial sector than other Canadian ETFs. The top-weighted sector is Utilities at 23.37%, with Financial Services comprising 16.48% of holdings and Information Technology 15.52%. Mid-range percentage securities include energy, industrials, and communications services.
Here are the top 10 holdings as of May 31, 2021, in the Horizons Active CDN Dividend ETF:
|ENGHOUSE SYSTEMS LTD||5.58%|
|CONSTELLATION SOFTWARE INC||5.08%|
|OPEN TEXT CORP||4.84%|
|BROOKFIELD INFRASTRUCTURE PARTNERS LP||4.47%|
|ROYAL BANK OF CANADA||4.27%|
|THE TORONTO-DOMINION BANK||3.63%|
|BANK OF MONTREAL||3.46%|
iShares Core S&P/TSX Composite High Dividend Index ETF (TSX:XEI)
iShares Core 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 and invests in Canadian companies operating across various sectors, with a risk rating of medium.
This high-yield ETF pays out its dividend monthly and at 0.22%, has one of the lowest MER fees. It has $572 million in assets and currently yields 6.31%.
XEI has a high concentration in the financial and energy sectors. While there are strong performing blue-chip stocks within the ETF, XEI offers less diversification than some of the other leading ETFs. 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 Core S&P/TSX Composite High Dividend Index ETF as of Jul 13, 2021:
|ROYAL BANK OF CANADA||Financials||5.18|
|TC ENERGY CORP||Energy||4.92|
|PEMBINA PIPELINE CORP||Energy||4.89|
|BANK OF NOVA SCOTIA||Financials||4.89|
|CANADIAN NATURAL RESOURCES LTD||Energy||4.74|
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. The fund is another dividend ETF 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. Canadian Select Dividend Index ETF 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 $1.4 billion. It has MER fees of 0.55% and currently yields 4.24%.
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, with strong representation from Canada’s ‘Big Banks’. In smaller percentages, the fund includes investments in Communications Services and Utilities.
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 of July 13, 2021, include:
|CANADIAN IMPERIAL BANK OF COMMERCE||Financials||8.36|
|CANADIAN TIRE LTD CLASS A||Consumer Discretionary||6.58|
|ROYAL BANK OF CANADA||Financials||6.51|
|BANK OF MONTREAL||Financials||6.16|
|BANK OF NOVA SCOTIA||Financials||5.07|
|TC ENERGY CORP||Energy||4.60|
|NATIONAL BANK OF CANADA||Financials||4.16|
BMO Canadian Dividend ETF (TSX:ZDV)
BMO’s ZDV fund, with net assets of $425.91 million, will suit investors with slightly higher risk tolerance. So the fund focuses on dividend yield, taregting companies with top dividend payouts and those with potential for long-term capital appreciation. The ETF is designed for investors looking for both income and growth in their portfolio.
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 dividend growth, yield, and payout ratio.
The ZDV ETF pays monthly dividends, has MER fees of .38%, and an annualized distribution yield of 5.57%.
The top 10 funds held in this ETF as of July 13, 2021 include:
|Weight (%)||Name||Base Market Value|
|3.17%||SUN LIFE FINANCIAL INC||13,495,792|
|3.14%||MANULIFE FINANCIAL CORP||13,353,127|
|3.09%||POWER CORP OF CANADA||13,142,551|
|3.03%||BANK OF NOVA SCOTIA/THE||12,908,023|
|3.01%||CANADIAN IMPERIAL BANK OF COMMERCE||12,826,625|
|2.98%||ROYAL BANK OF CANADA||12,693,637|
|2.94%||BANK OF MONTREAL||12,538,367|
S&P/TSX Canadian Dividend Aristocrats Index Fund (TSX:CDZ)
The Canadian Dividend Aristocrats Index Fund is one of the largest ETFs in the top five list, with net assets of $726 million. The intriguing name ‘aristocrat’ designates stocks that have a proven track record of raising their dividends for at least five consecutive years. The fund is attributed to a moderate risk level.
The goal for the CDZ ETF is to match the investment of the S&P/TSX Canadian Dividend Aristocrats Index. The fund is managed by BlackRock Asset Management Canada Limited. It offers a portfolio of high quality, dividend-paying Canadian companies operating across diversified sectors.
The fund has MER fees of 0.66% and pays out a monthly dividend that currently yields 5.57%. It is ranked at a medium level of risk.
The top 10 holdings in the Aristocrats Index Fund as of July 13, 2021, are:
|TRANSALTA RENEWABLES INC||Utilities||2.46|
|TRANSCONTINENTAL SUB VOTING INC CL||Industrials||2.45|
|NORTH WEST COMPANY INC||Consumer Staples||2.39|
|FIERA CAPITAL CORP CLASS A||Financials||2.37|
|CHOICE PROPERTIES REAL ESTATE INVE||Real Estate||2.16|
|CANADIAN IMPERIAL BANK OF COMMERCE||Financials||2.12|
|GRANITE REAL ESTATE INVESTMENT STA||Real Estate||2.07|
|INNERGEX RENEWABLE ENERGY INC||Utilities||2.04|
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 have 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). But those 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.
A reminder of how we can help
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We have created a free service that helps consumers find and rate local investment, financial and insurance professionals through a collective knowledge base of online feedback and reviews. Now, Canadians have the ability to sort and filter professional advisors by ratings, categories, language, fees, location and over 15 specialties as well as help with choosing the best dividend ETFs in Canada
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