Top Canadian Dividend ETFs

By Mark Seed, myownadvisor

Special to Financial Independence Hub 

What makes a great Exchange Traded Fund (ETF)?

What makes a great Canadian dividend Exchange Traded Fund? 

What are the top Canadian dividend ETFs to own?

You’ve come to the right site and the right post for these answers and my thoughts. Let’s go in this updated post!

Top Canadian Dividend ETFs – what is an ETF?

An ETF (Exchange Traded Fund) is a diverse collection of assets (like a mutual fund) that trades on an exchange (like a stock does).

This makes an ETF a marketable security = it has trading capability. Since you and buy and sell ETFs on an exchange during the day, ETF prices can change throughout the day as they are bought and sold.

ETFs may typically have lower fees than mutual funds (although not always), which can make them an attractive alternative to mutual funds.

Based on my personal experiences approaching 20 years as My Own Advisor I find ETFs very easy to buy using a discount brokerage and ETFs can provide a low-cost way to diversify your portfolio.

Although you don’t need to buy equity ETFs, it is my personal belief that you’re FAR better off owning more equities than bonds over long investing periods.

Simply put: learn to live with stocks for wealth-building. I’m trying to do the same!

What goes into a good ETF? What should you consider?

Before we get into my favourite Canadian dividend ETFs, here are some elements to consider as you select your ETFs for your portfolio:

1. Style – ETFs can track an index, follow an industry sector, be rules-based like some smart-beta funds are, or be much more. For the most part, I prefer plain-vanilla, broad market equity indexed ETFs. While I used to own a few dividend ETFs I no longer invest this way. I’ll link to that post later on. That said, Dividend ETFs can provide income to you as an investor; tangible money to use or reinvest as you please.

2. Fees – Hopefully by now from my site you know that high money management fees kill portfolio values over time. I try and keep my management expense ratio (MER) (the fee paid to the fund’s manager, as well as taxes and other costs) low (for as long as possible). Dividend ETFs often come with higher fees due to portfolio turnover. Something to think about.

Further Reading: Learn about MERs, TERs and more about ETF fees here.

3. Tracking error – In short, tracking error is the difference between the performance of the fund (the ETF) and its benchmark (what it tracks). I would advise you to look at the fund’s prospectus before you buy it and strive to own ETFs with low tracking errors.

4. Diversification – Along the same lines ‘Style’, you should be very mindful of the assets within an ETF before you buy it. ETFs are not created equal.

If you’re just starting out your investing journey, you can learn more about ETFs here.

Top Canadian ETFs vs. Dividend ETFs

When in doubt about buying any individual stock, I’ve been a huge fan of Canadian broad market ETFs like XIU, XIC, ZCN, VCN, along with others over the years.

I like XIU in particular.

XIU holds the largest 60 stocks in Canada and most of those stocks held in XIU pay dividends, although not all of them. Paying a dividend comes down to company policy. There are certainly many ways shareholder value is created.

While XIU has nowhere near the number of holdings that VCN has, XIU has delivered stellar long-term returns better than most.

I referenced this above: diversification can be a great ally as a risk mitigation tactic against stock picking but that doesn’t mean owning an ETF is bulletproof. Indexed ETFs hold all the stock studs and duds. Dividend ETFs might do the same. Dividend ETFs may limit your investing universe and your returns compared to other funds. Things to think about.

5. Tax efficiency – If you never intend to max out your TFSAs, RRSPs, kids’ RESPs, or other registered accounts then this is a non-issue for you. For some investors, however, who invest outside registered accounts (such as the aforementioned RRSPs, RRIFs, TFSAs, RESPs, LIRAs) like I do, then you need to consider the tax efficiency of your ETFs.

XIU in particular is very tax efficient. There are other ETFs to consider for tax efficiency as well.

In taxable accounts, I would advise you to look at the fund’s prospectus before you buy it and strive to own ETFs for your taxable account that are tax efficient; for the dividend tax credit or for capital gains.

Further Reading: How to invest for tax efficiency investing in taxable accounts.

6. History – While past performance is never indicative of future results unfortunately ETF/fund history is all we have since nobody can predict the financial future with any accuracy. Consider the track record of the ETF when it comes to returns.

What are my Top Canadian Dividend ETFs?

All data and information was updated in late-July 2024 and is approximate (for total returns) at the time of this post.

I’ve added global ETF XAW for comparison purposes only to the other four (4) Canadian dividend ETFs.  (Dislosure: I own XAW ETF and will continue to do so.)

Why I don’t own any Top Canadian Dividend ETFs…

Readers of this site will know I don’t own any Canadian dividend ETFs. I’ll share those reasons:

While the Vanguard Canadian High Dividend Yield Index ETF (VDY) is a good consideration, I own all the top-10 VDY stocks outright / on my own at the time of this post and have done so for 10+ years in many cases. So, no point in duplicating things …  Also, VDY is heavy on Canadian banks so there is sector concentration risk there I could avoid by owning some individual Canadian stocks. I can also decide to own some lower-yielding and higher=growth stocks inside my taxable account.

BMO Canadian Dividend ETF (ZDV) is another strong consideration but again, I own most of the ZDV top-holdings already and I can skip the modest MER/fee in doing so.

I’ve rotated out of REITs and other companies that iShares Core S&P/TSX Composite High Dividend Index ETF (XEI) holds for yield, so I don’t own this ETF either.

If I had to pick one ETF to own, for Canadian content, even though I don’t own it this would be the one: XIU. Year after year, I consider XIU arguably one of the best products you could own for the Canadian content in your portfolio; XIU delivers steady yield/income of about 3% and long-term growth.  

Source: iShares, XIU ETF.

Instead of owning XIU, I decided many years ago to unbundle this ETF for income and growth and avoid paying any money management fees or an advisor to manage my money.

Top Canadian Dividend ETFs Summary

There are certainly many other Canadian dividend ETFs to consider, including ETF tickers such as PDC, CDZ, XDV however these ones float to the top of my list for my reasons above.

1. Keep your fees low, regardless of the accounts you own.
2. Own many blue-chip Canadian companies across many sectors, including beyond financials and energy that some Canadian ETFs dominate.
3. Be tax efficient where you can, including owning lower-yielding, higher growth stocks in your taxable account and/or an ETF that delivers *eligible distributions. *See taxation tabs on ETF sites for details. *This way, you can take advantage of tax-efficiency as it relates to our Canadian dividend tax credit when you invest in these low-cost dividend ETFs in a taxable account.

My selection of Canadian dividend ETFs should not only provide income for life but some modest capital appreciation over time as evidenced by some of the 5-year and 10-year total returns above.

What are your top Canadian dividend ETFs?  Do you hold any and if so, which ones and why?  

Mark Seed is a passionate DIY investor who lives in Ottawa.  He invests in Canadian and U.S. dividend paying stocks and low-cost Exchange Traded Funds on his quest to own a $1 million portfolio for an early retirement. You can follow Mark’s insights and perspectives on investing, and much more, by visiting My Own Advisor. This blog originally appeared on his site on July 29, 2024 and is republished on the Hub with his permission.