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Canadian ETFs and Dividend Investing

By Isaac Schweigert | October 2, 2015

Canadian ETFs that pay dividends

We get asked about Canadian ETFs quite often, especially those that pay dividends. Just like investing in individual stocks that pay dividends (especially those that have a history of growing their dividends), this approach is getting more popular all the time.

 

How do dividends work and what are your options?

The return on a stock is composed of two parts: the dividend (if any) and growth (change in the share price). Historically, dividends made up most of the return on stocks. Companies that have a long history of paying dividends (often called blue-chips) are highly sought after. Even if the stock price is not going up, you are still receiving a regular return from the dividend.  As a bonus, in Canada dividends are taxed much more favourably than the income from a bond or savings account, making them popular with investors looking for income.

 

What to Watch For When Dividend Investing

When investors are first introduced to the idea of investing for dividends, they are often attracted to stocks with the highest yields.  When the dividend yield on a stock approaches or exceeds 10% you need to understand why the yield is that high.  Is it because the stock price has dropped a lot?  And if so, is that because the company is in poor health and is likely to cut the dividend to conserve cash? A similar question to ask for any stock is: How sustainable is the dividend?  The answers to these questions can only be obtained by doing in depth research on the company in question.  If you don’t have the time to research individual stocks yourself, there are many dividend-paying Canadian ETFs to choose from.

 

Canadian Dividend ETF Choices

iShares, BMO, Vanguard, Horizons, First Asset, Purpose Investments, and First Trust all offer dividend ETFs (exchange traded funds). Some use a passive quantitative methodology to choose which stocks to include and will reselect the stocks for the portfolio on a specified basis (quarterly, semi-annually or annually).  Others take a more active approach and have a manager that trades the stocks on a frequent basis. The passive approach is the less expensive choice, while the active ETFs can be as costly as a mutual fund.

Most providers of Canadian ETFs offer an ETF that focuses on investing in Canadian stocks with attractive dividends.  Below are the ETFs that invest primarily in Canadian stocks. Most of the ETF providers also offer dividend ETFs that invest in US and international stocks with a focus on dividends.

 

The iShares Canadian Select Dividend Index ETF (XDV) is one of the largest dividend ETFs in Canada at $1.29 billion in assets. It tracks the Dow Jones Canada Select Dividend Index which is comprised of the 30 highest yielding, dividend paying companies in Canada. The stocks are selected on an annual basis.  The current yield on XDV is 4.6%.

MER TER Bid/Ask Spread Total Cost
0.55% 0.00% 0.09% 0.64%

 

 

BMO’s Canadian Dividend ETF (ZDV) is smaller, but is less expensive. It uses a rules based methodology that considers the 3 year dividend growth rate, the dividend yield, and the payout ratio when selecting stocks. The portfolio is rebalanced in June and the stocks are reselected in December.  The current yield on ZDV is 4.9%.

MER TER Bid/Ask Spread Total Cost
0.40% 0.04% 0.13% 0.57%

 

 

Vanguard’s FTSE Canadian High Dividend Yield Index ETF (VDY) tracks the FTSE Canada High Dividend Yield Index. This index excludes REITs, ranks the remaining stocks by dividend yield, and the top 50% by market cap are included in the index. The index is rebalanced quarterly and the stocks included are reselected in December.  The current yield on VDY is 3.9%.

MER TER Bid/Ask Spread Total Cost
0.30% 0.00% 0.11% 0.41%

 

 

The Horizons Active Canadian Dividend ETF (HAL) is an actively managed ETF subadvised by Guardian Capital. Guardian uses proprietary methodology to select stocks which focuses on dividend growth, payout and sustainability. The active management of this ETF increases its cost; Horizons absorbed 0.45% of the cost (MER would have been 1.24%) in the first 6 months of 2015.  The current yield on HAL is 3.2%.

MER TER Bid/Ask Spread Total Cost
0.79% 0.06% 0.15% 0.99%

 

 

The First Asset Active Canadian Dividend ETF (FDV) invests in an actively managed portfolio comprised primarily of dividend-paying and other equity securities of Canadian companies. This ETF is also permitted to invest up to 30% of its assets in dividend-paying and other equity securities of non-Canadian companies. The portfolio manager uses a macroeconomic view to select sectors to focus on and then uses fundamental analysis to select the individual stocks in each sector.  The current yield on FDV is 4.4%.

MER TER Bid/Ask Spread Total Cost
0.69% 0.07% 0.33% 1.09%

 

 

The Purpose Core Dividend Fund (PDF) invests in a diversified portfolio of North American companies with the capacity to pay and grow their dividends. The portfolio consists of approximately 40 high quality stocks equally weighted, which are selected using a rules based methodology. As of September 18, 2015, PDF was 61% Canadian stocks, 37% US stocks and 2% cash.  The current yield on PDF is 3.5%.

MER TER Bid/Ask Spread Total Cost
0.73% 0.05% 0.04% 0.82%

 

 

First Trust AlphaDEX™ Canadian Dividend Plus ETF (FDY) invests in Canadian dividend paying stocks using a rules based methodology. Companies included must have a market cap over $200 million, with average daily trading volume of $5 million. The remaining companies are screened using momentum, revenue growth and value factors. The top 75% are subjected to further review based on investment potential. The manager is also permitted to write call options on up to 50% of the portfolio to generate income.  The current yield on FDY is 4.4%.

MER TER Bid/Ask Spread Total Cost
0.66% 0.10% 0.18% 0.94%

Those are your choices. But which are the best ETFs?

While ModernAdvisor is not using any dividend-specific Canadian ETFs in our client portfolios at this time, ZDV is our favourite in this category.  It does the best job of keeping costs low while also providing good diversification.  ZDV’s largest position is just over 3% of its assets and only one-third of its exposure is in the financials sector.

While VDY is lower cost, its 2 largest positions are 25% of assets and over 60% of its exposure is in the financials sector.

HAL, FDV, PDF and FDY all provide similar levels of diversification as ZDV but their total cost is too high.


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Isaac Schweigert

Isaac Schweigert

Isaac is a CFA charterholder and is Portfolio Manager and Chief Compliance Officer at ModernAdvisor. He has over 11 years of investment industry experience, including asset allocation, portfolio management, due diligence, compliance and reporting.



  • Stephanie Khurana

    Are Canadian Dividend ETFs taxed the same way as canadian dividends in a non-registered account?

    • ModernAdvisor

      Canadian dividend ETFs are taxed very similarly to Canadian dividend paying stocks.

      The distributions from a Canadian dividend ETF are often made up of dividends, capital gains, return of capital and sometimes regular income. For example, in 2014 BMO’s Canadian Dividend ETF (ZDV) paid distributions of 0.80 per unit. Of that 88% was dividends, 6% was capital gains and 6% was return of capital.

      When you sell an ETF the difference between the amount you receive from the sale, less the price you paid (adjusted for any return of capital), is your capital gain- the same as with a stock.