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The Best Canadian Dividend ETFs





Dividend stocks have always been a popular topic which was reinforced by the reader comments from the 6th anniversary giveaway post.  Dividend investing has been a part of my portfolio strategy since I started this blog but with a bit more focus on building that portion of the portfolio in recent years.

To rewind a little, I keep my Canadian dividend stocks in a leveraged non-registered account where I use my HELOC for capital and claim the interest as a tax deduction.  I own individual stocks, rather than Canadian dividend ETFs for various reasons (find out why), but there are a number of circumstances where ETFs would work better.  They are easier to manage, and they follow a particular index which helps reduce the risk of owning individual stocks.  There are also downsides, particularly the annual MER and the lack of control of which positions that the ETF owns.

The selection of Canadian Dividend ETFs are relatively limited, but the list has grown since BMO and Vanguard have introduced their Canadian based ETFs. Note that the list below does not include Canadian real estate investment trusts (REITS). If you’re interested in some diversification, check out my article on international dividend ETFs.

Canadian Dividend ETFs

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

Investment Style: This ETF follows the dividend achievers index which holds dividend stocks that have a history of increasing their dividend (at least 5 consecutive years).  I use this strategy for my leveraged dividend portfolio.  The downside of this ETF is that it’s relatively expensive with a MER of 0.67%.

Top 10 Holdings (34% of assets):

  1. AGF Management (AGF.B)
  2. Atlantic Power Corp (ATP)
  3. AG Growth International (AFN)
  4. Reitmans (RET.A)
  5. Transcontinential Inc (TCL.A)
  6. Exchange Income Corp (EIF)
  7. Enbridge Income Fund Holdings (ENF)
  8. IGM Financial (IGM)
  9. Bird Construction (BDT)
  10. Northern Property REIT (NPR.UN)

MER: 0.67%

Dow Jones Canada Select Dividend Index Fund (XDV)

Investment Style:  This ETF uses a methodology that combines dividend growth, yield and average payout ratio, then chooses 30 positions with the highest yield.  Although cheaper than CDZ, the MER is still pretty high for an ETF at 0.55%.

Top 10 Holdings (50.5% of assets):

  1. CIBC (CM)
  2. Bonterra Energy (BNE)
  3. National Bank (NA)
  4. Toronto Dominion Bank (TD)
  5. Bank of Montreal (BMO)
  6. Royal Bank of Canada (RY)
  7. Telus (T)
  8. BCE (BCE)
  9. Bank of Nova Scotia (BNS)
  10. IGM Financial (IGM)

MER: 0.55%

FTSE Canadian High Dividend Yield Index ETF (VDY)

Investment Style:   Vanguard is pretty new to the Canadian ETF scene but they have a good selection with lower MERs which helps put pressure on the other providers.  This ETF follows the FTSE index, but does not include much detail about their strategy except that they are a  market weighted index that purchases common stocks with a history of above average dividend yield.

Top 10 Holdings (60.5% of assets):

  1. Royal Bank of Canada (RY)
  2. Toronto-Dominion Bank (TD)
  3. Bank of Nova Scotia (BNS)
  4. Bank of Montreal (BMO)
  5. Enbridge Inc. (ENB)
  6. TransCanada Corp. (TRP)
  7. Canadian Imperial Bank of Commerce/Canada (CM)
  8. Cenovus Energy Inc. (CVE)
  9. Manulife Financial Corp. (MFC)
  10. Sun Life Financial Inc. (SLF)

MER: 0.30%

BMO Canadian Dividend ETF (ZDV)

Investment Style:  This ETF is a little unique where it is yield weighted.  It uses a methodology that looks for dividend growth, yield, and payout ratio.   Although the MER on the low side for this group, the stock selections appear to be on the volatile side.

Top 10 Holdings (30.3% of assets):

  1. Veresen Inc. (VSN)
  2. Extendicare Inc (EXE)
  3. TransAlta Corp. (TA)
  4. Freehold Royalties Ltd (FRU)
  5. Crescent Point Energy Crp (CPG)
  6. Reitmans (Cda) Ltd Cl A (RET)
  7. PetroBakken Energy (PBN)
  8. Baytex Energy Corp. (BTE)
  9. Enbridge Income Fund Hld (ENF)
  10. Northland Power Inc (NPI)

MER: 0.35%

Final Thoughts

Out of the four Canadian dividend ETFs, there is no clear cut “winner” as each have their good and bad attributes.  I like the strategy that CDZ uses, but their MER is high, and some of their positions are questionable.  For example, some of the holdings have not increased their dividend for 5 years in a row which goes against their core strategy.  As well, CDZ has very little financial sector coverage.

XDV is a popular ETF,  but expensive with significant exposure to the financial sector.  In terms of MER, Vanguards VDY is the best deal with 0.30% MER, and has very similar holdings as XDV.  Finally, as previously mentioned, ZDV has a reasonable MER, but the top holdings appear to be very volatile with high payout ratios.  If I had to choose, I would likely buy a combination of CDZ and VDY as their holdings complement each other without much overlap.

If you’re looking for distributions, there are other options as well such as REIT ETFs like iShares XRE, BMO ZRE or Vanguards VRE.  For the adventurous, there are also covered call ETFs available by BMO.





15 Comments, Comment or Ping

  1. 1. Al

    Canadian dividend ETFs are skewed towards energy and financial names and obviously selected because of dividends… what could possibly go wrong?

    An open question: i you constructed your own portfolio from individual stocks, would it look like the exampkes above?

  2. 2. CiscoKid

    Is there something to VDY that I don’t see? This is supposed to be a dividend paying ETF, but from what I can see, its payout is ridiculously low… I see it’s gone us in value a good amount since inception, but that would be capital gains & not dividends… Is it expected to increase it’s payout significantly over time?

    CDZ also looks to have a payout of only a little over 3% annually, is that considered good in your books? because I don’t see that as very good

    I haven’t bought any dividend ETFs as of yet, but I’d like to for the stability, I have a good amount of BCE.TO & AGF-B.TO.

    A little off topic, but do any of you have any opinion on on AGF-B.TO? I’ve done well (bought at 9.30) But I question the stability of my investment, I don’t think such a high payout is sustainable, any thoughts?

    Thanks!

  3. 3. On Demand

    If you buy CDZ thru iTrade, no commission will be charged. Good for dollar cost averaging. So I own CDZ along with some solid dividend stocks like BCE, HSE, POW, etc.

  4. @Al, my leveraged portfolio looks like a combination of VDY and CDZ. You can take a look at the individual picks here: http://www.milliondollarjourney.com/smith-manoeuvre-portfolio-august-2012.htm

    @CiscoKid, CDZ picks stocks with a history of growth, thus the lower yield. CDZ and VDY both have similar yields. Personally, I dont’ like buying div stocks just for the yield b/c a lot of times, the high yield means an unsustainable dividend. Once a dividend gets cut, look out below!

    @On Demand, good point, that will help reduce the overall MER.

  5. Why don’t you hold some of your dividend paying stocks in your TFSA?
    Dividend income would not be taxable. I keep my measly holdings in there.

    Perhaps your holdings are too vast to fit in the confines of the TFSA but at least $5.500 every year could be sheltered.

  6. 6. mavener

    Just a comment.

    Is it possible for you to input date stamps on your articles, I was reviewing a few of the your other topics, but got mixed up with some of them and the order I was reading them in as there are no date stamp, its hard to tell.

    Also, time stamps for people would be nice too!

  7. I really dislike the holdings and weighting of CDZ. The “exception” clause really lowers the bar, allowing companies to still qualify if they miss up to two years out of the five. And by weighting according to yield, as you can see, questionable companies are rising to the top as investors flee for the mountains. The only reason it’s done well over the last three years has been the outperformance of the quality companies that compose a smaller percentage of the overall weight.

    The ETFs are a good place to look for companies to hold directly though, for those interested in direct ownership.

  8. I like the idea of the ETFs until I see the stocks they pick. I’m sorry but I don’t trust Sun Life, for example. I think I’ll have to stick with individual stocks where if I screw up I know who to blame.

  9. 9. Jim Patterson

    Wow. It’s great to get a tax deduction when you use your HELOC to invest, but you still have to pay the interest even when it’s effectively pre-tax. How can you make money on dividend stocks after doing that? My TD Bank line of credit (also secured) wants 4.75%; not much room for profit there, and I expect you’d lose money with any of the Dividend ETFs.

  10. @Jim – For us, our HELOC is still at prime, so 3%, so after tax we are paying around 2%.

  11. Your approach sounds interesting. When you’re looking at buying more of a stock on your list, what do you use as the target yield before you buy?

  12. 12. Jagas

    I spent a good part of the weekend constructing a small ETF based portfolio and after going back and forth on a number of Canadian Dividend ETFs for a portion of the portfolio I decided to split it down the middle between CDZ and ZDV. Had I read your post first I may have saved myself some time!

  13. 13. Trevor

    I’m in a very low tax bracket right now (my wife is in a high one however) and our TFSA are maxed out.

    because I’m in a low tax bracket, I thought rather than putting money in her or my RRSP that I could invest it in a dividend fund and end up paying almost zero taxes on it.

    I live in BC and make <37K (student)

    If for example, I buy $10,000 of ZDV and it goes up by 5% (gain of $500) – how much would I have to give the government? Based on my low income and the generous tax credits it almost seems like investing in the an eligible dividend ETF would be similar to keeping money in a TFSA.

    From the table I have I have an 'eligible dividend tax rate' of -6.84%. I'm not really sure what that means.

    Thanks for the help.

  14. 14. John

    CDZ’s distributions have not increased over 6 years. They tend to fluctuate between 5 and 7 cents a unit. For a fund that selects dividend achievers–companies that consistently raise their dividends–this is not impressive. .

  15. Another one to add to the list is iShare’s XEI which has a relatively high yield with lower MER (0.20%).

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