The Best Canadian Dividend ETF

Have you decide that you want to be a dividend investor and are looking for the best Canadian dividend ETF? Well, look no further. In this article, I’ll share what I believe to be the best dividend ETFs for Canadians. Depending on your situation, one of these dividend ETFs will be the perfect fit for your portfolio. Let’s get started!

Dividend Investing Made Easy

Building a dividend-focused portfolio can be time-consuming. The usual strategy is to construct a watch list of companies that pay good dividends (usually in the 3-4% range). You filter out companies whose dividends are too high a percentage of their earnings and companies that don’t typically raise their dividends. Next, you buy into whichever companies you feel are fairly valued and offer a good yield. Over time you slowly add to your portfolio, selectively investing in companies on your watch list. This strategy requires you to learn about the companies you’re following. It also requires some skill as you try to judge when they’re a good buy and when you need to let others go.

If you don’t have the time or familiarity with stock investing fundamentals, there’s an easier way to create a diversified portfolio of quality dividend stocks. Doing so is as easy as picking one of the many dividend ETFs from our friends at iShares, Vanguard, and their competitors. There are dividend-focused ETFs that track broadly diversified markets, earn you international exposure, and give you close to the same diversification as broad market ETFs. Thanks to these products, there’s never been an easier time to become a dividend investor!

Finding the Best Canadian dividend ETF

The first thing you should consider when researching dividend ETFs is their Management Expense Ratio (MER). You don’t want to invest in a dividend ETF just to have much of its income reduced by a high MER. Generally, dividend ETFs that are focusing on a specific market tend to have higher MERs. A good example of this is the Horizons China High Dividend Yield Index ETF (HCN). This fund’s MER comes in at 0.97%, which is far higher than that of a regular diversified index ETF.

The next important thing to consider is diversification. If you want to invest in U.S. companies, doing so through a dividend ETF means many companies will be left out of your portfolio. Having a dividend-focused portfolio will also mean that you might be overweight certain sectors. In Canada, most of the dividends are paid out by financial, energy, utilities, and telecommunication companies. As a result, the Canadian part of your dividend-focused portfolio may be overweight these sectors. That might not be a bad thing, but it’s important to at least be aware that your portfolio may be less diversified if you focus too heavily on dividend-paying companies.

Lastly, it’s important to consider how a fund’s assets may expose you to withholding taxes on your dividends. Luckily, this isn’t a problem for Canada-focused dividend ETFs, which only invest in Canadian equities.

The Best Canadian Dividend ETFs

You’ve probably never heard of the funds I consider to be the best dividend ETFs for Canadians. Each have their pros and cons, but their low MERs and great yields make them excellent additions to any portfolio.

iShares Core MSCI Canadian Quality Dividend Index ETF (XDIV)

XDIV Rating

For many investors, the best Canadian dividend ETF is a relatively new offering from iShares. Started in 2017, XDIV tracks the MSCI Canada High Dividend Yield index. By tracking this index, XDIV focuses on well-established companies with above average dividend yields and great track records of increasing their dividends over the long term.

There’s a lot to like about XDIV. First of all, it’s unique for a Canadian dividend ETF in that its MER is only 0.11%. That’s comparable to many broad market Canadian ETFs like the iShares Core S&P/TSX Capped Composite Index ETF (XIC), which has a MER of 0.06%. Another impressive attribute of XDIV is that it yields 5.22%. This yield is on the top end for a dividend ETF not overly focused on high-yield companies. Like the other ETFs on this list, XDIV’s dividends are paid monthly, which is one of the main draws for investing in dividend ETFs.

The only problem with XDIV is its lack of diversification. At only 20 holdings, XDIV is the least diversified ETF on this list. Worse, its assets are heavily concentrated in financial institutions, which account for over 50% of its assets. Compare this to XIC which invests about half as much in the financial sector. Despite these negatives, the ability to earn sizable dividend returns with such a low-cost ETF is an incredibly attractive proposition. It’s the reason why our portfolio has about half of our Canadian equity assets invested in XDIV.

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

XEI Rating

I consider XEI to be the second, or depending on your situation, the best Canadian dividend ETF. XEI is the ideal fund for anyone looking to invest their entire Canadian allocation in dividend-paying stocks. It strikes the right balance between low MER and high diversification for a Canadian dividend ETF. Tracking the S&P/TSX Composite High Dividend Index, XEI has attracted over $641 million in assets since its inception in 2011. Don’t let its name fool you, the index XEI tracks is focused on established, profitable companies with long dividend track records. It is not focused on risky “high-yield” companies – its top holdings are Royal Bank of Canada, Telus, and BCE Inc.

XEI has a reasonable MER of 0.22% and pays a monthly distribution currently yielding 5.25% annually. It does this while investing in 75 Canadian companies, which is far more than its sister fund XDIV. Its top sectors include 29% financials, 28% energy, 14% utilities, and 11% communication. This great allocation allows you to be reasonably diversified across the Canadian market while being able to focus on well-paying dividend companies.

Vanguard FTSE Canadian High Dividend Yield Index ETF (VDY)

VDY Rating

In 2012 Vanguard tossed its hat into the ring to compete for the title of the best Canadian dividend ETF. Its entrant is VDY, which has since attracted over $600 million in assets. Vanguard is committed to having some of the lowest management expense ratios in the industry and VDY is no exception with its MER of just 0.22%. VDY tracks the FTSE Canada High Dividend Yield Index and seeks to invest in great dividend paying companies across all industries. Doing so has allowed VDY to build an attractive portfolio yielding 5.42% monthly.

It’s clear that VDY was designed to compete directly with the iShares S&P/TSX Composite High Dividend Index ETF. Both funds yield about the same and both share an equally low 0.22% MER. VDY is a little less diversified with only 45 holdings, with its top sectors being 58% financials, 24% energy, and 9.5% telecommunication. For those not worried about being overweight financials, VDY can be a great, low-cost investment that allows you to accumulate dividends must faster than your typical broad market Canadian equity ETF.

BMO Canadian Dividend ETF (ZDV)

ZDV Rating

The Bank of Montreal offers what I consider to be the fourth best dividend ETF for Canadians. Started in 2011, ZDV focuses on the three year dividend growth rate, current dividend yield, and the payout ratio to determine which companies to invest in. This strategy is quite similar to what your typical dividend investor would do when selecting which individual companies to own.

What I like about ZDV is its competitive MER – for a Canadian dividend ETF – of 0.38%. I also like that it makes up for some of the diversification issues that XDIV has. It does this by investing in more companies, with 52 total holdings. What’s better is that these companies are far less concentrated in financials. Overall, ZDV has a sector weighing that’s quite similar to the Canadian market more broadly, with its top 3 sectors being financials (34%), utilities (17%), and energy (12%). ZDV also pays a competitive, monthly dividendyielding 5.29% on $471 million in assets.

Other Popular Canadian Dividend ETFs

I considered many other Canadian ETFs when I tried to decide what was the best dividend ETF for Canadians. Two that stuck out to me as possible contenders were also from iShares. First, there’s the iShares Canadian Select Dividend Index ETF (XDV). Started in 2005, XDV is iShares’ oldest Canadian dividend ETF with over $1 billion in assets. Like XDIV, this iShares offering lacks diversification, with only 30 holdings. However, my primary reason for not recommending XDV is its higher than average MER of 0.55%. The fund yields less than XDIV at 4.48% monthly – perhaps because of this higher MER.

Another ETF I considered is the iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (CDZ). This ETF claims to focus on a famous group of companies known as “Dividend Aristocrats”. These are companies that have increased their dividend every year for at least 25 years – at least, that’s what most people consider as “Dividend Aristocrats”. In reality, CDZ invests in a much more inclusive group, targeting companies that have increased their dividends annually for just 5 consecutive years. Other than its name being a little misleading, the main reason I don’t recommend CDZ is because of 0.66% MER and meager 3.61% yield.

Best Canadian Dividend ETF Comparison

Fundamentals

Looking at the fundamentals, we can see that each of these funds has a yield of over 5%. That means investing $10,000 would earn over $500 per year in dividends. Since each fund pays dividends monthly, you could use this income to offset monthly expenses like your phone or internet bill. This strategy is called building a “dividend snowball” and is one of the perks of dividend investing.

Best Canadian dividend ETF fundamentals
Fundamentals for each of the best Canadian dividend ETFs.

When comparing these funds, BMO’s Canadian Dividend ETF (ZDV) stands out as having an exceptionally high P/E. This can be attributed to ZDV’s “rules-based methodology” which is distinct from tracking an index (XDIV, XEI, and VDY all track indexes). As a result of this rules-based methodology, the fund has come to own more businesses with higher earnings multiples. This implies that ZDV is more growth-oriented than other dividend ETFs in Canada.

Sector Weightings

When looking at the sector weightings of each fund, it’s clear that XDIV is the least diversified; it has assets in only 4 of the 11 main sectors. XEI stands out for being the most invested in real estate, with 8% allocated to real estate investment trusts. None of the funds have a significant portion of their assets invested in technology, which is what we would expect for a Canadian-focused dividend fund.

Best Dividend ETFs Sector Weighting
Sector weightings of each of the best Canadian dividend ETFs.

Past Performance

Although past performance isn’t indicative of future results, it can be interesting to compare each fund’s recent performance. So far this year, XEI has been the worst performer with a decline of over 18%. In 2019, however, it outperformed the other funds by between 0.5% and 4%. Although each fund is quite different, their performance has been similar over their recent histories.

Best Dividend ETFs Calendar Returns
Past 5 years of calendar performance of each of the best Canadian dividend ETFs.

Closing Thoughts

In my view, the best Canadian dividend ETF is either XDIV or XEI. However, both funds have certain tradeoffs, and so which fund you invest in will depend on your particular situation. For me, I prefer XDIV because I enjoy its especially low MER. I am not concerned with being under-diversified because I also hold Vanguard’s FTSE Canada All Cap Index ETF (VCN) in my portfolio. XEI might be a much better choice for anyone that would like to hold a single Canadian ETF in their portfolio. With XEI, you pay a little more in management fees, but what you gain is a well diversified Canadian ETF that more closely matches the sector allocation of the broad market.

Thanks for Reading!

Thank you so much for reading! If you’re interested in investing, I encourage you to check out my recent article on gold bullion ETFs. If you’re interested in saving, check out how I saved up over $180,000 to purchase a home! Please follow me on my journey towards financial independence by following AnotherLoonie on social media or signing up for my monthly newsletter! Here’s how I did this month.

4 comments

  1. Good analysis. I disagree that MER is the first consideration for these funds. Because we have such a relatively small mix of dividend stocks in Canada, I think the diversification is far more important. Your sector weight chart illustrates just how biased some funds in Canada are. Naturally investors will chose there exposure based on other factors in their portfolio, but if one wants a cross section of the Canadian market and earn monthly dividends. I think it’s important to go beyond banks, telcos and utilities. Furthermore, it’s interesting to compare all of these to VCN from a total return perspective YTD. It’s also important to understand WHY one would want to hold a dividend ETF.

    For the record I’m long VDY and ZDV, but I have decided that all future money will go into ZDV. Cheers

    1. Hi Money Mechanic,

      There’s a lot to consider when picking a dividend ETF (or any fund, really) and I think VDY and ZDV are both great choices. ZDV is really unique in that its investment strategy is much more flexible than its competitors. I like XDIV because of its MER, but I understand the other ETFs on this list will be better choices for many people. Sector allocation is key, as most people aren’t comfortable being so overweight financials in Canada (nor should they be!).

      At the end of the day, you’re right that total return matters. That’s why I invest in VCN for about half of our Canadian equity allocation. We do love our monthly dividends, though, and so we jumped at the opportunity to pick up some XDIV as well. For many people, dividend investing is an easy way to buy companies that are value-oriented, stable, and at fair prices. For that reason, I think dividend investing will always be popular. Plus, hey: monthly income!

      Thanks again stopping by. I look forward to your next podcast episode!

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