Readers sometimes ask me: What’s your favourite dividend ETF? That’s easy: the one that will produce the best returns over the next several years, of course. But since that’s impossible to predict, today I’ll discuss five dividend exchange-traded funds that I consider to be worthy candidates.
If you’re not keen on owning individual stocks – or if you just want to add some diversification to your stock portfolio – dividend ETFs are a great solution. They give you the benefits of owning dividend stocks – including income that grows over time and is taxed favourably thanks to the dividend tax credit – while eliminating the need to monitor individual companies.
Another advantage of ETFs is that many discount brokers let you buy and sell them without paying commissions. This is especially advantageous for people who want to regularly reinvest cash that accumulates in their portfolio. That’s precisely what I do in my own accounts: When I have a few hundred bucks, I add it to one of my ETF positions. I’m especially fond of doing this when markets are tanking, as they’ve been doing recently.
With stock prices well down from their highs, dividend yields – which move in the opposite direction to stock prices – are more attractive now than they were a few months ago, making this a good time to invest in dividend ETFs.
ETFs can also help you control your emotions during volatile times, which is critical to investing success. Since you don’t own the stocks directly in an ETF, you will be less likely to do something rash that you might later regret, such as selling a perfectly good company because its stock price has taken a hit. The steady income can also help to soothe your nerves.
Finally, most ETFs have very reasonable management expense ratios. The MER, which includes the ETF’s management fee, operating expenses and taxes, is the annual cost, expressed as a percentage, that investors pay for owning the units. By keeping your costs down and giving you a diversified basket of stocks, dividend ETFs can be a great core holding for investors seeking income and long-term capital growth.
Note: For the following ETFs, trailing yields are calculated as the sum of cash distributions over the past 12 months, divided by the ETF’s current unit price. Five-year returns are annualized figures for the period ended Sept. 30 and assume all ETF distributions were reinvested in additional units. Returns are after fees.
iShares Canadian Select Dividend Index ETF (XDV)
MER: 0.55 per cent
Trailing yield: 4.6 per cent
5-yr ann. return: 5.1 per cent
The iShares Canadian Select Dividend Index ETF focuses on stocks that have maintained or increased their dividends over the past five years and whose dividend coverage ratio (earnings divided by dividends) averaged at least 125 per cent over that period. XDV holds all the usual dividend suspects – including banks, utilities, pipelines and telecoms – but its 55-per-cent weighting in financials (including insurers and asset managers) suggests diversification may be less than optimal.
BMO Canadian Dividend ETF (ZDV)
MER: 0.39 per cent
Trailing yield: 4.4 per cent
5-yr ann. return: 5.9 per cent
BMO Canadian Dividend ETF’s lower-than-average MER and relatively good diversification – financials account for less than 40 per cent of its assets – make it a solid choice. Unlike the rest of the ETFs discussed here that track an index, ZDV uses a “rules-based methodology” that includes factors such as the stock’s three-year dividend growth rate, payout ratio and yield – all important considerations when choosing dividend companies.
iShares S&P/TSX Composite High Dividend Index ETF (XEI)
MER: 0.22 per cent
Trailing yield: 4.4 per cent
5-yr ann. return: 6.9 per cent
There are a lot of things you can’t control: interest rates, inflation, bear markets. But one thing you can control are your costs. The iShares S&P/TSX Composite High Dividend Index ETF has an MER of just 0.22 per cent, which is among the lowest for a Canadian dividend ETF. That’s one reason for the fund’s above-average five-year return. Another reason is XEI’s relatively high 31-per-cent weighting in energy stocks, which have done well thanks to strong oil and gas prices.
Invesco Canadian Dividend Index ETF (PDC)
MER: 0.54 per cent
Trailing yield: 4.1 per cent
5-yr ann. return: 5.7 per cent
Stocks with above-average yields and consistently growing dividends are the holy grail for dividend investors, and those are exactly the qualities that the Invesco Canadian Dividend Index ETF seeks. The higher-than-average MER might turn off some investors, but PDC has been a steady performer.
Vanguard FTSE Canadian High Dividend Yield Index ETF (VDY)
MER: 0.22 per cent
Trailing yield: 4.2 per cent
5-yr return: 7.9 per cent
If you can get past VDY’s 55-per-cent weighting in financials – most of which is made up of the Big Six banks – there’s a lot to like about Vanguard’s FTSE Canadian High Dividend Yield Index ETF. The fund’s MER is low, and its five-year return is tops among the five ETFs discussed here. Will VDY’s outperformance continue? Beats me. But, like all the ETFs discussed here, it’s a fine choice.
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John Heinzl