The Best Canadian Dividend ETFs

There are investors out there who prefer investing directly in dividend stocks – we get that. However, we also believe low-cost Exchange Traded Funds (ETFs) can also have a place in a portfolio – including Canadian Dividend ETFs.

What are the best Canadian dividend ETFs to own?

Are there some advantages or disadvantages to owning dividend ETFs over other investments?

Read on, find out, including how we continue to invest!

What is an ETF? What is a Dividend ETF?

Before we talk about the Best Canadian Dividend ETFs to own, let’s revisit what an ETF is and why such a product may be helpful for your investment portfolio.

An ETF, by name, is a fund that is traded on an exchange. An ETF is a type of security that tracks an index, sector, specific commodity, or even an entire investment strategy. ETFs can be bought and sold on an exchange like a stock exchange while the market is open.

Now, unlike any mutual fund (that “pools” investments in stocks, bonds or other securities funded by individual investors who own units of the fund), an ETF trades during the day much like a stock does whereby mutual funds trade once per day after the market closes.

Similar to a mutual fund however, investors own units of the ETF and not the assets directly. This is an important distinction we’ll come back to later.

A dividend ETF is therefore just one type of Exchange Traded Fund that is typically designed for investment in a selection of dividend-paying stocks. These dividend ETFs typically track an index that is screened to include blue-chip type companies — meaning 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.

This is a good time to remind you that dividends are just one way of rewarding shareholders – owners of common stocks.

Like My Own Advisor has on his awesome “Dividends” page, 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.

We believe this is important 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 to others – although we love dividend paying companies quite a bit!

An investor could technically create their own dividend (income stream) by timing the sale of their stock shares. This may or may not appeal to some investors. Ultimately total return matters. 

We believe there are lot of ways to invest. 

Those ways really boil down to your goals, income objectives, tolerance for market volatility, timelines for investing and a few other factors. We can say along with some individual stocks, buying and holding indexed ETFs remain one of our favourite ways to invest for long-term wealth building is via investing in index funds and/or ETFs.

You can check out our reasoning in this comprehensive article below:

Investing in Index Funds and/or ETFs – What is Index Investing and Why it Matters!

Who should consider investing in dividend ETFs?

The goal for many dividend ETFs 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 who don’t want to deal with any stock selection as well. Many well-constructed dividend ETFs will save you the time and effort you might have spent on researching individual stocks, figuring out where value may lie, and dealing with individual stock purchases. Instead of doing that work, you have built-in diversification via the dividend ETF.

So, the punchline is: if you are seeking income from your portfolio then dividend ETFs can be a great consideration.

What are the best Canadian dividend ETFs?

We believe there is no one best Canadian dividend ETF to own – it can be a bit subjective – so we’ll provide a list. Our list actually depends on a number of factors. Here are the reasons why certain ETFs are near the top of our Canadian best-of list:

1. We like Canadian dividend ETFs that have a bias to lower fees/lower management expense ratios (MERs). High fund fees are just one of the things to be wary about when it comes to the financial industry – read more about that in The Four Key for Investing Success. Keeping your money management fees lower, overall, is a great way to keep more money in your pocket and build wealth for you versus others.
2. We like Canadian dividend ETFs that are not too heavy in any one sector. This way, the fund has some of that built-in diversification we talked about.
3. Finally, we like Canadian dividend ETFs that are tax-efficient. That means their distributions can qualify for the Canadian dividend tax credit when assets/ETFs are held in a taxable account. We’ll have more to say on this subject in future posts.

These are the best Canadian dividend ETFs

We’ve selected the following funds that rise to the top as best Canadian dividend ETFs to own:

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)

1. Horizons Active CDN Dividend ETF (HAL)

Among our list, Horizons Active CDN Dividend ETF is smaller in assets under management and likely lesser-known but a gem. We like this ETF among the rest because it invests primarily in equity securities of major North American companies with above-average dividend yields. The MER is modest at 0.67% since we know fees matter. The investment objective of this fund is to seek long-term total returns consisting of regular dividend income and modest long-term capital growth. The ETF, to the best of its ability, seeks to hedge its U.S. currency exposure to the Canadian dollar at all times.

As a result of its construction, HAL is highly diversified across a wide variety of companies and industry sectors which is not always the case with other Canadian dividend ETFs. Read on!

2. iShares S&P/TSX Composite High Dividend Index ETF (XEI)

iShares S&P/TSX Composite High Dividend Index ETF strives to replicate the performance of the S&P/TSX Composite High Dividend Index. This fund has been stalwart in this space for years and it’s easy to see why. This high-yield ETF pays out its dividend monthly and at 0.22%, has one of the lowest MER fees around.

While XEI has a higher concentration in the financial and energy sectors that we’d probably build on our own, at 75 holdings, it has plenty of other blue-chip stocks in the mix to own. The 10-year return record is strong as well although it trails XIU (the TSX index).

3. iShares Canadian Select Dividend Index ETF (XDV)

iShares Canadian Select Dividend Index ETF, another BlackRock fund, seeks to replicate the performance of the Dow Jones Canada Select Dividend Index. What does that mean? The objective of XDV is to create long-term capital growth (along with income) by investing in close to 30 of the highest-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 – to no surprise. The MER for this active management of just 30 stocks is also a bit higher, checking in at 0.55% but remains good value for income-seekers.

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. XDV typically has many Canadian banks and pipeline companies in the top-10 holdings.

As an honourable mention – you might also consider XDIV. Although XDIV only has 23 holdings at the time of this post, it sports a very low MER of 0.11% (we like that) and focuses on managing a “low-cost portfolio of Canadian stocks with above-average dividend yields and steady or increasing dividends.”

4. BMO Canadian Dividend ETF (ZDV)

BMO’s ZDV 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 and has been a popular pick with many income investors over the years based on our experience. This ETF pays out monthly, has a relatively low MER (at 0.39%) and the distribution is consistently over 4%. A very top contender in this space!

5. iShares S&P/TSX Canadian Dividend Aristocrats Index Fund (CDZ)

The Canadian Dividend Aristocrats Index Fund, also managed by BlackRock Asset Management Canada, is one of the largest ETFs in this space. This fund gets lots of attention because of the ‘aristocrat’ name. That essentially means stocks in the fund have a proven track record of raising their dividends for at least five consecutive years. That modest consistency may or may not appeal to investors.

The downside we see from this fund is the MER – fees are 0.66% at the time of this post which is a bit high for us. Then again, 10-year returns have been very strong rivalling one of our favourites: XIU. Read on!

6. Vanguard Canada FTSE Canadian High Dividend Yield Index ETF (VDY)

This fund (FTSE Canadian High Yield Dividend Index ETF) invests primarily in common stocks of Canadian companies that pay juicy dividends. The performance of this fund strives to mirror a broad Canadian equity index that measures the investment return of common stocks of Canadian companies that are characterized by high dividend yield. Currently, this Vanguard ETF seeks to track the FTSE Canada High Dividend Yield Index (or any successor thereto).

Historically, “high dividend yield” stocks in Canada mean Canadian banks, pipeline companies, and depending upon the market cap and yields of other companies, some energy stocks. So, it is less diversified than other ETFs – something to be mindful of. Posted 5-year returns are north of 10% at the time of this post and VDY carries a relatively low MER of 0.21%. ETF distributions are monthly.

7. iShares S&P/TSX 60 Index ETF (XIU)

Did we save the best for last? Maybe!

XIU tracks the S&P/TSX 60 Index. The fund seeks long-term capital appreciation – but you can have your cake and eat it too!

XIU is the oldest Canadian Dividend ETF with an inception date in 1999. The ETF is also the largest from our list with over $10 billion CAD in assets. We love XIU given it’s very low MER (0.18%), it has 60 holdings (more than many above for diversification), and you have exposure to many sectors – although financials and energy still dominate ~50% of the funds holdings based on Canadian market cap indexing approaches.

Above all, this fund is very tax-efficient in a taxable account. All distributions paid have historically been eligible for the Canadian Dividend Tax Credit – My Own Advisor covered that important point here.

Tale of the Tape – Best Canadian Dividend ETFs

Here is a handy table as we near our summary for this post:

Returns posted as of end of August 31, 2021. Information is always subject to change.

Best Canadian Dividend ETFs Summary

At the end of the day, we can’t really confirm whether dividend investing or dividend investing via dividend ETFs is right for you.

We can share however we remain owners of many individual Canadian stocks, including the common names in many of these funds above, and we index a good part of our portfolio beyond Canadian borders. If dividend investing is something that you are interested in, then dividend ETFs may be a good choice for you – for some income and growth. Ultimately from this list, we feel for the low-fee, long-term generous returns, and modest diversification you would be hard-pressed to own anything different than the iShares ETF XIU. It comes out as a slight favourite among “the best” from this list.

We look forward to updating this post more over time to keep it current for you!

Thanks for reading and sharing.

Further Reading:

• Is Dividend Investing Right for You?
• Build Long-Term Wealth with our Model ETF Portfolios here.
• How to automatically reinvest those dividends to grow your portfolio.

Looking for help?

If you’ve already been investing for some time, and want to know if you’re on track to meet any long-term goals including semi-retirement or retirement, using dividend stocks or dividend ETFs or other investments – we’re here to help!

If you are interested in participating in a case study, money coaching session(s), and/or obtaining private projections for your financial scenario to answer questions like “how much will I have in retirement?”, please contact us here to get started.

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