11 Best Dividend ETFs in Canada (Oct 2022): Earn Passive Income

Want to invest in dividend stocks in Canada but don’t want the hassle of managing a portfolio?

Between 1930 and 2021, dividends contributed roughly 40% towards the total return of the S&P 500 Index. 

Dividend ETFs could be a great way to increase your portfolio’s income and add some return stability over time.

Below are the best dividend ETFs in Canada.

Pros and Cons of Dividend ETFs

Here are some of the things you should consider when investing in dividend ETFs:

Pros
  • Better stock diversification
  • Access to dividend reinvestment plans (DRIPs)
  • Easier portfolio geographical diversification
Cons
  • The need to pay the fund’s MER each year
  • Lack of control over when underlying investments are bought and sold
  • Buying and selling ETF units at the bid and ask prices (price spread)
  • An ETF’s unit value can sometimes deviate from the value of its underlying holdings
  • Small ETFs may close down if they can’t attract enough capital

Best Dividend ETFs in Canada

1. Manulife Smart Dividend ETF

  • Ticker: CDIV.TO
  • Currency: CAD
  • Inception Date: November 25, 2020
  • Assets under Management: $230.4 Million
  • Management Expense Ratio: 0.28%
  • Listed on: Toronto Stock Exchange
  • Dividend Yield: 2.82%
  • Approximate Holdings: 60
  • Management Style: Active
  • Risk Rating: Medium
  • Distribution Frequency: Quarterly
  • Top Three Sectors: Financials, Materials, and Energy
  • Stock Price: $11.85
  • YTD Return: -4.64%

Manulife’s CDIV ETF is one of the lowest-cost, dividend-focused ETFs accessible to investors in Canada. It follows an active and quantitative strategy with constant involvement from the portfolio managers.

CDIV invests exclusively in dividend-paying Canadian stocks. It has a very short performance track record but has grown to a fairly large size in a short while. 

The ETF offers a great yield, with distributions being paid to investors on a quarterly basis. CDIV is fairly well-diversified, with around 60 different Canadian stock positions.

Since the Canadian market is heavily concentrated in select sectors, this is also reflected in the ETF’s top sectors. The top sectors of CDIV include financials, materials, and energy.

The ETF is assigned a medium risk rating from Manulife, which is in line with most dividend-focused strategies.

Aside from the short performance track record, Manulife’s Smart Dividend ETF has excellent overall features. Accessing a quantitative and active strategy at one of the lowest MERs for a dividend ETF in Canada is an amazing offer from Manulife.

2. Vanguard U.S. Dividend Appreciation Index ETF

Vanguard Logo Transparent
  • Ticker: VGG.TO, VGH.TO (CAD currency – hedged)
  • Inception Date: August 2, 2013
  • Assets under Management: $972.24 Million
  • Management Expense Ratio: 0.30%
  • Listed on: Toronto Stock Exchange
  • Dividend Yield: 1.37%
  • Approximate Holdings: 290
  • Management Style: Passive
  • Risk Rating: Medium
  • Distribution Frequency: Quarterly
  • Top Three Sectors: Industrials, Health Care, and Financials
  • Stock Price: $66.06
  • YTD Return: -10.58%

Vanguard’s VGG ETF is another low-cost dividend-focused ETF available to Canadians VGG invests in US stocks that have a record of increasing their dividends over time. It is a passive strategy that follows the S&P U.S. Dividend Growers Index.

VGG is the unhedged version of Vanguard’s strategy, exposing you to currency rate shifts between the US dollar and the Canadian dollar. 

VGH is the ETF ticker for an identical strategy that removes currency fluctuations from the equation.

VGG has a fairly long track record and is a large ETF in terms of assets under management. It pays a relatively lower yield because of the strategy’s focus on dividend growers as opposed to high-dividend-paying companies.

The ETF pays out quarterly distributions to its investors. In terms of diversification, it is a very well-diversified strategy with just under 300 US stock holdings.

The US market is many times larger and more diverse than Canada’s market from a sector perspective. Since the strategy focuses on dividend growers, the fund’s top sectors are industrials, health care, and financials.

VGG is assigned a medium risk rating from Vanguard, which is similar to most dividend strategies.

If you are willing to accept a lower yield from your dividend ETF in exchange for investing in companies that offer a growing dividend over time, VGG is a great choice. 

3. BMO US Dividend ETF

BMO
  • Ticker: ZDY.TO 
  • Currency-Hedged Ticker: ZUD.TO
  • US Dollar Ticker: ZDY-U.TO (US Dollar)
  • Currency: CAD and USD
  • Inception Date: March 19, 2013
  • Assets under Management: $481.73 Million
  • Management Expense Ratio: 0.30%
  • Dividend Yield: 2.67%
  • Approximate Holdings: 100
  • Management Style: Rules Based
  • Risk Rating: Low to Medium
  • Distribution Frequency: Monthly
  • Top Three Sectors: Health Care, Information Technology, and Financials
  • Stock Price: $34.35
  • YTD Return: -5.67%

BMO’s ZDY ETF is a well-priced ETF available to Canadians that comes with a lot of options. ZDY takes a rules-based approach to investing in US dividend-paying stocks that are based on dividend growth rate, yield, and dividend payout rate. 

ZDY is the unhedged version of the strategy, meaning that your returns will be impacted by currency fluctuations between the US and Canadian dollars. 

ZUD is the ticker for the same strategy, with the currency impact hedged out. ZDY.U is the US dollar version of the strategy, meaning it can be purchased on the US side of your accounts.

ZDY has a long track record and is a large ETF in terms of assets. The strategy’s yield is decent but on the lower end of how much dividend-focused ETFs typically pay.

The ETF pays out distributions to investors on a monthly basis, which is a nice differentiator from dividend funds which pay distributions quarterly. With around 100 stock holdings, it is well-diversified.

By again investing in US companies, the strategy is heavily exposed to sectors such as health care, information technology, and financials. 

ZDY is assigned a low to medium risk rating from BMO. While this may be appealing to investors, any type of equity fund should generally be accepted as carrying at least a medium level of risk. The low to medium risk rating is likely to understate the fund’s true risk.

If you are looking for a rules-based approach with a lot of flexibility in terms of investment options (hedged and USD options), ZDY is an excellent choice to consider.

4. iShares US High Dividend Equity ETF

ishares logo
  • TickerXHU.TO, XHD.TO (Currency Hedged)
  • Currency: CAD
  • Inception Date: February 10, 2015
  • Assets under Management: $198.56 Million
  • Management Expense Ratio: 0.33%
  • Listed on: Toronto Stock Exchange
  • Dividend Yield: 2.49%
  • Approximate Holdings: 75
  • Management Style: Passive
  • Risk Rating: Medium
  • Distribution Frequency: Monthly
  • Top Three Sectors: Health Care, Energy, Consumer Staples
  • Stock Price: $27.34
  • YTD Return: 5.39%

XHU from iShares is another US high-dividend strategy available as an ETF in Canada. The ETF is passively managed and invests in US stocks with a focus on dividend yield. The index that it tracks is the Morningstar Dividend Yield Focus Index.

XHU is the unhedged version of the strategy, so your total returns will be impacted by changes in the exchange rate between the US and Canadian dollars. XHD is the ETF ticker for the same strategy that is currency hedged. 

XHU has a medium-length performance track record. The strategy’s yield is fairly low, despite the focus on US dividend-paying companies.

This ETF also pays out distributions on a monthly basis, similar to fixed-income funds. The fund has roughly 75 underlying stock holdings, providing a decent level of diversification.

XHU is focused on sectors such as health care, energy, and consumer staples. XHU is assigned a medium risk rating by iShares, which again is in line with most dividend strategies.

If you are looking for a vanilla, US-focused dividend strategy on the Canadian ETF shelf, XHU is a great one to consider.

5. Fidelity Canadian High Dividend ETF

Fidelity Logo
  • Ticker: FCCD.TO
  • Currency: CAD
  • Inception Date: September 13, 2018
  • Assets under Management: $199.61 Million
  • Management Expense Ratio: 0.35%
  • Listed on: Toronto Stock Exchange
  • Dividend Yield: 3.06%
  • Approximate Holdings: 65
  • Management Style: Passive
  • Risk Rating: Medium
  • Distribution Frequency: Monthly
  • Top Three Sectors: Financials, Energy, Communication Services
  • Stock Price: $27.55
  • YTD Return: -4.22%

The FCCD ETF offered by Fidelity is a high dividend strategy that focuses on Canadian companies. The ETF is passively managed and tracks the Fidelity Canada Canadian High Dividend Index.

FCCD has a very short performance track record but has grown to a fairly large size in a short period of time. The ETF’s MER is on the lower end of the dividend-focused ETF category in Canada.

FCCD pays out distributions to investors on a monthly basis and offers a decent dividend yield. Relative to other Canadian dividends ETFs like CDIV, this yield is substantially lower. The fund has roughly 65 underlying stock holdings, offering a decent level of diversification.

The ETF is again biased towards prominent sectors in the Canadian market. Its top sectors include financials, energy, and communication services. FCCD is assigned a medium risk rating by Fidelity, which is standard for most dividend-focused equity ETFs.

If you are looking to target the Canadian market with a high dividend bias, FCCD is a great ETF to consider alongside others, such as CDIV and ZDV.

6. BMO Canadian Dividend ETF

BMO
  • Ticker: ZDV.TO
  • Currency: CAD
  • Inception Date: October 21, 2011
  • Assets under Management: $917.85 Million
  • Management Expense Ratio: 0.35%
  • Listed on: Toronto Stock Exchange
  • Dividend Yield: 4.07%
  • Approximate Holdings: 50
  • Management Style: Rules Based
  • Risk Rating: Medium
  • Distribution Frequency: Monthly
  • Top Three Sectors: Financials, Energy, Utilities
  • Stock Price: $19.09
  • YTD Return: -1.14%

Using a similar approach as the one for ZDY, ZDV instead focuses on Canadian dividend-paying stocks. ZDV takes a rules-based approach to invest in stocks that are based on dividend growth rate, yield, and dividend payout rate. 

ZDV has a long performance track record and is a very large ETF in terms of assets under management. The ETF’s MER is on the lower end of the dividend-focused ETF category in Canada.

ZDV pays out distributions to investors on a monthly basis and offers a great dividend yield. The dividend yield is currently second only to CDIV. 

The fund has roughly 50 underlying stock holdings, making it relatively concentrated when compared to other ETFs on our list. In reality, it still offers an adequate level of diversification for investors.

Like other Canadian ETFs on our list, ZDV has similar sector biases as the overall Canadian market. Its top sectors include financials, energy, and utilities. ZDV is assigned a medium risk rating by BMO.

With a great yield and excellent overall features, ZDV is an excellent choice as a Canadian ETF that focuses on Canadian high-dividend companies.

7. BMO International Dividend ETF

BMO
  • Ticker: ZDI.TO
  • Currency: CAD
  • Inception Date: November 5, 2014
  • Assets under Management: $383.24 Million
  • Management Expense Ratio: 0.40%
  • Listed on: Toronto Stock Exchange
  • Dividend Yield: 4.29%
  • Approximate Holdings: 100
  • Management Style: Rules Based
  • Risk Rating: Medium
  • Distribution Frequency: Monthly
  • Top Three Sectors: Financials, Healthcare, Industrials
  • Stock Price: $17.6
  • YTD Return: -11.86%

BMO offers a great international dividend strategy to Canadians through its ZDI ETF. ZDI takes a rules-based approach to investing in stocks that is based on dividend growth rate, yield, and dividend payout rate.

International strategies are crucial portfolio building blocks that help to ensure your investments are globally diversified.

ZDI has a medium-length performance track record and is a large ETF in terms of assets. The ETF’s MER is relatively higher than most of the ETFs on our list, likely due to its international coverage.

ZDI pays out distributions to investors on a monthly basis and offers one of the highest dividend yields among the dividend ETFs on our list. 

The fund has approximately 100 stock holdings, making it well diversified from a stock perspective.

As an international strategy, ZDI does not have any major country-specific bias. With that said, its top sectors include financials, healthcare, and industrials.

With excellent features across the board, ZDI is an amazing dividend ETF on the Canadian shelf to consider for your portfolio.

8. Fidelity International High Dividend Index ETF

Fidelity Logo
  • Ticker: FCID.TO
  • Currency: CAD
  • Inception Date: September 13, 2018
  • Assets under Management: $54.72 Million
  • Management Expense Ratio: 0.45%
  • Listed on: Toronto Stock Exchange
  • Dividend Yield: 5.05%
  • Approximate Holdings: 110
  • Management Style: Passive
  • Risk Rating: Medium
  • Distribution Frequency: Monthly
  • Top Three Sectors: Financials, Communication Services, Real Estate
  • Stock Price: $20.3
  • YTD Return: -9.56%

Fidelity’s FCID ETF is an internationally-focused dividend strategy available on the Canadian ETF shelf. FCID is passively managed and tracks the Fidelity Canada International High Dividend Index.

The international geographical scope makes strategies like FCID very important when building a well-rounded portfolio that is properly diversified globally.

FCID has a short performance track record and is a fairly small ETF in terms of assets under management. The ETF is likely not small enough to put it at risk of closing down.

The ETF’s MER, because of its international mandate, is higher than most MERs on our list. FCID pays out distributions to investors on a monthly basis and offers an excellent dividend yield. 

The fund has just over 100 stock holdings, making it well diversified from a stock perspective.

As an international strategy, FCID again does not have any major country-specific bias. Its top sectors include financials, communication services, and real estate.

Although small in assets and with a short performance track record, FCID is important to consider as a dividend-focused ETF in Canada due to its international mandate.

9. Invesco Canadian Dividend ETF

Invesco logo
  • Ticker: PDC.TO
  • Currency: CAD
  • Inception Date: June 8, 2011
  • Assets under Management: $892.36 Million
  • Management Expense Ratio: 0.56%
  • Listed on: Toronto Stock Exchange
  • Dividend Yield: 3.73%
  • Approximate Holdings: 45
  • Management Style: Passive
  • Risk Rating: Medium
  • Distribution Frequency: Monthly
  • Top Three Sectors: Financials, Energy, Communication Services
  • Stock Price: $30.01
  • YTD Return: -3.44%

Invesco’s PDC ETF is another dividend-focused Canadian stock strategy. PDC is passively managed and tracks the NASDAQ Select Canadian Dividend Index.

PDC has a long performance track record and is a very large ETF in terms of assets under management. The ETF’s MER is relatively high compared to other Canadian dividend strategies on our list, especially since the ETF is passively managed.

PDC pays out distributions to investors on a monthly basis and offers an excellent dividend yield. The ETF has one of the highest dividend yields among the ETFs on our list and the highest among Canadian-focused dividend ETFs.

The fund has roughly 45 underlying stock holdings, making it one of the most concentrated mandates on our ETF list. 

The sector biases of the ETF match overall Canadian market biases. The ETF’s top sectors include financials, energy, and communication services. PDC is assigned a medium risk rating by Invesco, which is fairly standard for a dividend-focused ETF.

Aside from the high MER, PDC comes with great features and a high dividend yield. It’s a good choice to consider for Canadian dividend stock exposure in your portfolio.

10. TD Q Global Dividend ETF

TD Logo
  • Ticker: TQGD.TO
  • Currency: CAD
  • Inception Date: November 20, 2019
  • Assets under Management: $19.36 Million
  • Management Expense Ratio: 0.45%
  • Listed on: Toronto Stock Exchange
  • Dividend Yield: 3.86%
  • Approximate Holdings: 200
  • Management Style: Quantitative
  • Risk Rating: Low to Medium
  • Distribution Frequency: Monthly
  • Top Three Sectors: Information Technology, Financials, Healthcare
  • Stock Price: $14.52
  • YTD Return: -3.85%

TD’s Q Global Dividend ETF is the only global dividend ETF on our list. The ETF’s portfolio managers use a quantitative approach to pick investments, and the ETF can invest in global stocks, preferred shares, and REITs.

TQGD has a very short performance track record and is a tiny ETF in terms of assets under management. Its current asset size does put it at risk of closing in the future if it isn’t able to grow its assets. 

The ETF’s MER is relatively high compared to other dividends ETFs on our list but is priced very well, considering that it follows a global strategy.

TQGD pays out distributions to investors on a monthly basis and offers a great dividend yield. 

The fund has roughly 200 underlying stock holdings, which makes it very well diversified. 

Due to its global mandate, TQGD does not really have any country-specific sector bias. The ETFs’ top sectors include information technology, financials, and healthcare.

TD assigns a low to medium risk rating to the ETF, which is likely an understatement of TQGD’s risk. The ETF should likely be considered medium risk.

Although it has few assets and a very short track record, TQGD pays a great yield, is the only global dividend ETF on our list, and has a quantitative approach to investing.

11. RBC Quant Canadian Dividend Leaders ETF

rbc logo
  • Ticker: RCD.TO
  • Currency: CAD
  • Inception Date: January 2014
  • Assets under Management: $114.13 Million
  • Management Expense Ratio: 0.42%
  • Listed on: Toronto Stock Exchange
  • Dividend Yield: 3.15%
  • Approximate Holdings: 75
  • Management Style: Quantitative
  • Risk Rating: Medium
  • Distribution Frequency: Monthly
  • Top Three Sectors: Financials, Energy, Industrials
  • Stock Price: $23.04
  • YTD Return: -3.87%

RBC’s RCD ETF is another Canadian dividend stock strategy available on the ETF shelf in Canada. The ETF’s portfolio managers use a quantitative approach to pick equities and look at a stock’s balance sheet strength, dividend payout, and ability to pay or grow dividends in the future.

RCD has a medium-length performance track record and is also decently sized in terms of assets under management. The ETF’s MER is slightly higher compared to other Canadian dividends ETFs on our list. 

RCD pays out distributions to investors on a monthly basis and offers an excellent dividend yield. With approximately 75 stock holdings, it is a fairly well-diversified strategy.

Once again, the ETF’s sector biases reflect some of the Canadian market’s top sectors. RCD’s top sectors include financials, energy, and industrials.

RBC assigns a medium risk rating to the ETF, which is in line with most other dividend-focused equity strategies.

With good overall features and an excellent dividend yield, RCD is a great ETF to consider as a Canadian dividend-focused stock ETF.

Are Dividend ETFs Worth the MERs?

In our opinion, dividend-focused ETFs are almost always worth the MER that they charge for several reasons. 

Like most ETFs on our list, dividend-focused strategies usually have at least 50 underlying stock holdings. The number of stock holdings can increase to several hundred in some cases, which provides an even higher level of diversification. Choosing and monitoring even 50 dividend stocks is a difficult task for most investors.

Dividend reinvestment plans (DRIPs) are also another great feature of most dividend ETFs. This allows you to automatically reinvest any received dividends back into the ETF once they are paid out. For a self-picked stock portfolio, you are left with making the decision several times a year for each stock.

Constructing a well-built portfolio will require you to invest globally in most cases. Doing stock research on dividend-paying companies in different countries can be a very difficult task for most investors. Building a well-diversified portfolio from a geographical perspective is easy through dividend ETFs.

How to Build a Portfolio with Dividend ETFs and Bond ETFs

In most cases, dividend-focused ETFs invest almost entirely in dividend-paying stocks. With this in mind, these ETFs fall under your stock allocation when putting together your overall portfolio.

Determining your overall portfolio asset allocation based on your goals and situation is an important first step to growing your investment account over time. Your asset allocation refers to what percentage of your investment is invested in stocks, bonds, or other investments.

Given the nature of dividend stocks, they are generally more conservative than something like a high-risk technology start-up stock. 

Situations in which you should likely have a higher allocation to bond ETFs versus dividend ETFs include:

  • You have reached an old age
  • You have a short-term goal that will require you to sell your investment in the near future.
  • Your risk tolerance is fairly low.
  • The return you are looking to accomplish can be achieved with a safer asset class (like bonds in most cases)

Situations in which you should likely have a higher allocation to dividend ETFs instead of bond ETFs include:

  • You have a long-term investment time horizon
  • You are young
  • You have long-term goals which let you invest over multiple market cycles
  • You have a moderate or high-risk tolerance
  • You are looking for higher returns or a higher income stream (in some cases)

Depending on your situation, you may even have an allocation of zero towards either dividend ETFs or bond ETFs.

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Conclusion

We have covered some of the best dividend strategies available on the Canadian ETF shelf above. 

Although dividend strategies in your portfolio can be a great source of passive income, there are other ways to generate constant cash flows.

Unsure if dividend ETFs are right for you? Here’s a complete list of the best ETFs in Canada.

Also check out our picks for the top Canadian dividend stocks.

Photo of author
Author Bio - Christopher Liew is a CFA Charterholder with 11 years of finance experience and the creator of Wealthawesome.com. Read about how he quit his 6-figure salary career to travel the world here.

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31 thoughts on “11 Best Dividend ETFs in Canada (Oct 2022): Earn Passive Income”

  1. #11 in the article is CI WisdomTree Canada Quality Dividend Growth Index ETF (DGRC.TO), but it shows a fund with ticker DXM on the image.

    Reply
  2. In case this is helpful, here are a couple of funds to consider that only hold shares in the big six banks (Tickers: PIC-A and PIC-PR.)

    The funds are tied together by a split-share structure. This means that the PIC-PR fund is set up to yield dividend income while PIC-A is set up to earn capital gains and a tiny amount of dividends (if any) for investors.

    Once PIC-PR reaches its 5.6% dividend income target, the remaining dividends that are earned are funnelled into the PIC-A fund. Hence, PIC-A has more upside (and downside) potential.

    I looked at the distribution breakdown of each of the funds for the past several years.

    The PIC-PR fund is usually 94-100% dividends; the remainder is ROC.

    The PIC-A fund is usually entirely ROC. There is no capital gains as you would expect. So, the way it achieves its capital gains objective is when the fund is sold. All the ROC payments are tax-free, but at the same time, the ROC payments lower the investor’s cost base, making the capital gain higher when the fund is finally redeemed.

    The fund prices are designed to be relatively constant — around $15 for the PIC-PR fund. So the funds are not likely to have large gains or losses from price fluctuations when they are sold.

    Here is the link to the fund company:

    https://mulvihill.com/overview.aspx?fund_id=7

    Reply
  3. Hi Chris,
    Thank you very much for writing this article.
    I am planning to buy bond/fixed income/dividend-paying ETFs for my TFSA, but I am confused and scared!! I want to pick the ones that make my TFSA portfolio balanced (weighted towards generating income:)). My TFSA (60k) is for retirement (period around 20-20 years).
    I have a mix of XHY or CHB (not sure which one)+ ZAG+ZFH (not sure)+ ZWC/ZWG (not sure) in mind. I prefer index ETFs (passive) with low MERs. I am not sure about the strategy, index, and MERs of ZFH/ZWC/ZWG/XHY/CHB. Some of these ETFs look active (rather than passive) to me, maybe I am wrong!
    I would be grateful if you let me know your thoughts on these or suggest any ETF with a low MER and proven record that follows a good index for my TFSA.
    Thank you very much.
    Sara

    Reply
    • Sara,

      I would say that in general, the lower the MER, the more passive the fund is.

      The ZWC fund and all the other BMO Covered Call “Z” funds have a relatively higher MER because they have to manage the covered-call contracts they write.

      These contracts protect you from a downward market, but also supress capital gains in unexpected upward spikes in the market.

      However, the covered call contracts also produce their own capital gains (paid out as ROC) when they are successful. That’s what limits the losses in a downward market.

      In 2021, the ROC component of the ZWC distributions was 59%. That suggests that the contracts were beneficial because the ROC component for other similar ETFs (that have much the same holdings) is about 5%.

      Reply
      • Yes, but if you have more money to invest than your TFSA can hold, there is a tremendous advantage to allocating the Canadian dividend-paying investments outside the TFSA (and your growth investments inside the TFSA).

        For example, if you live in Ontario, and your “taxable income” (line 26000) is under $49,000 your tax rate on dividends is negative 5%. If it is under $90,000, your tax rate on dividends is negative 1%. So, your tax refund will actually increase when you enter your dividend income into your tax program.

        But keep in mind, when you earn $100 in dividends, your tax program will actually gross it up to $138 for line 26000 which bumps you to the next tax bracket sooner.

        Reply
  4. The BMO Canadian High Dividend Covered Call ETF just cut its June/2021 dividend from 11 cents to 10 cents per share. That’s a surprise since the markets, especially the Canadian ones, have been pretty good for the past year.

    Reply
  5. Chirtospher,

    While you were finding the BMO document on Call Options, I found this excellent YouTube video which reinforces what the BMO document states.

    https://www.youtube.com/watch?v=1gXlr18gWSY

    I have a much better understanding of how covered calls work, but it leaves me with many more questions.

    From what I learned, When a fund manager sells a covered call option, it receives income for that sales cointract. When that contract expires, that income lowers the cost base of the stock which contributes to higher capital gains when the stock is sold. Likewise, that same income can also reduce capital losses.

    That said, I do not see how the income from the covered call can contribute to dividend income nor interest income unless the fund manager is holding cash. Yet interest income is common in all the dividend ETFs I have seen.

    Reply
  6. Does the high dividend yield of the BMO Canada High Dividend ETF come entirely from the ETF’s holdings or does some of it come from the covered call options? And where does its interest income come from?

    Reply
      • I checked the distribution breakdown on Morningstar which shows interest. Click on the “Distributions” tab next to “Performance.”
        https://www.morningstar.ca/ca/report/etf/performance.aspx?t=0P00019S2Q&lang=en-CA

        Also, distributions are paid out monthly in equal sizes as shown on the Globe and Mail website. Click on the “Corporate Actions” tab:

        https://www.theglobeandmail.com/investing/markets/stocks/ZWC-T/performance/

        I assume that either the first or last distribution of the year is the interest component.

        The BMO website says, “the option premium provides limited downside protection. ”
        https://www.bmo.com/gam/ca/advisor/products/etfs?fundUrl=/fundProfile/ZWC#fundUrl=%2FfundProfile%2FZWC

        I am definitely going to buy this ETF! (BTW, BMO has other similar covered calls ETFs, but this one has the highest yield)

        Thanks for the info!

        Reply
        • Ah I see now, yes that makes sense. Thanks for digging into that, the interest income it shows there is a bit confusing. I wouldn’t think it would be taxed as interest income though, but you might want to double-check that.

          Reply
          • I just purchased the BMO ETF today, so I will know exactly what the breakdown of the distribution is next year. I will let you know If there are any surprises. (Sometimes Morning Star is wrong.)

            But getting back to my original question. The reason why I asked if the options contribute to the dividend yield is because, the yield is significantly higher than any other similar ETFs even though they hold many of the same stocks; (admittedly in different proportions). So I was wondering what factor is most responsible for the higher yield

          • Great question, I had to look it up. I believe it does. See this here https://www.bmoetfs.ca/uploads/covered_call_option_strategy_eng-22.pdf it says “The covered call option strategy, also known as a buy–write strategy, is designed to provide an investor with a double source of income: an option premium plus the dividend yield. The strategy is implemented by writing (selling) a call option contract, while owning the underlying stock. It is considered an income enhancement strategy because it generates additional cash flows compared to only owning the underlying stock.

      • I finally got my answer why the dividend yield for ZWC is so high. Ιt’s not!

        Over half of the distribution during 2020 amounts to ROC. The remainder is dividend income. That’s why the distribution of this ETF is twice as high as other similar ETFs that hold the same stocks.

        This is not good news if you are trying to take advantage of the dividend tax credit in a non-registered account, but it is fine if you are simply looking for a consistent high stream of income in a tax-efficient manner.

        The Morningstar data that shows interest in the distribution is not correct.

        The true distribution breakdown is shown on the BMO website (second table at the bottom) but it shows blank for the current year. If you change the year to 2020 or earlier, you will see that ROC is high for all years — sometimes over 50%. This seems to be true for all BMO Covered call ETFs.

        https://www.bmo.com/gam/ca/advisor/products/etfs?fundUrl=/fundProfile/ZWC!hash!tax%26distributions#fundUrl=%2FfundProfile%2FZWC%23tax%26distributions

        Apparently, it is common in the ETF industry to pay out a certain amount of ROC to maintain a consistent income stream as the BMO states below:

        Tax considerations for the BMO ETF family:
        https://www.bmo.com/assets/gam/docs/BMO%20ETF%20Taxation.pdf

        … As a consideration that generally applies to the
        ETF industry … a portion of the cash
        distribution may represent a return of capital (ROC), which
        is not taxable ….

        … The ETF will then pay out the cash components received as part of
        its distribution to maintain the ETF’s yield. This will result in a
        small amount of ROC.

        Equity ETFs:
        Generally for an equity only ETF, the cash distributions will
        include dividends and a small amount of ROC …

        Reply
          • Now that I received my 2021 tax slip for the BMO CDN Hi Dividend Covered-Call ETF (ZWC), I just want to provide an update on my findings.

            Indeed, the fund distributions do not have the high dividend yield as claimed because most of the distributions are made up of original investor capital (ROC).

            From the $1.25 annual distribution amount (per unit), 41% of that was in dividends and 59% was ROC. (Typical ROC for similar ETFs is around 5%).

            There is no interest income as Morningstar reports and the dividend yield of the fund comes out to about 3.2%. The remaining 4.5% of the yield is ROC.

            At first, I was cynical about the large ROC component because it appeared that the fund was exaggerating its returns with investors’ original capital. That’s not true.

            ROC is merely capital gains on a tax-deferred basis. Once the fund is sold, you end up in the same financial position. That’s because the ROC of a distribution not only reduces the unit price of a fund, but it also reduces the ACB by the same amount.

            The capital gains field (box 21) of the T3 slip is blank but the ROC field (box 42) and dividend fields (boxes 24,25,26) are filled in. The same is true for past years too.

        • In response to my own comment above, I would like to bring to light that ROC does not exaggerate the fund’s returns with investors’ original capital as I thought.

          I did the math and discovered that ROC is actually capital gains that are deferred. It works that way because ROC lowers the average cost base (ACB) which effectively produces higher capital gains when the fund is sold.

          Of course, there is still the issue that the fund’s (ZWC) dividend yield is nowhere near 7%, but the annual distribution itself is.

          Reply
  7. Was of great interest to read your list of divided ETFs.

    Do you have a list of Canadian dividend ETFs that pay monthly dividends that you can post?

    Look forward to seeing your list!

    Reply
  8. Very informative. I’ve just recently retired and just getting my feet wet in trading investment. I heard of dividend investing and now the monthly dividend ETF’s. I need a regular monthly return on my investment. How would I know if an ETF is giving monthly dividend? Please let me know. I’m new to this and I’m still feeling my way around. Thanks a lot.

    Reply
    • Having looked into this for about a year, you can roughly estimate that the dividend portion of the annualized monthly income that the fund produces will be roughly 3-4% of the fund price at the beginning of the year. It cannot really be much higher because it must be consistent with what the underlying stocks pay out in dividends. The funds cannot produce dividends on their own.

      If the annualized monthly income is higher, that extra amount is likely capital gains (shown as ROC on your T3 slip) which is something the funds can produce on their own by buying and selling, and writing covered call contracts and the like.

      Of course, keep in mind that every fund is different with different strategies and objectives.

      Reply
  9. For a 60 year old who doesn’t care about the stock price increasing but looking at the dividends … it sounds like zwc would be a safer etf than xei .. but I am giving up growth of etf?

    Reply
  10. Awesome read, as both my wife and I as well as our 20yr young daughter all have atleast 2 of these etf stocks in our portfolio.

    Looking towards building our passive income towards financial freedom.

    Reply

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