7 Best Dividend ETFs in Canada For Consistent Income in April 2024

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

Dividend ETFs can be a great hands-off approach to receive regular income and diversify your holdings at a low cost.

Dividends can be a huge portfolio booster. Between 1930 and 2021, dividends contributed roughly 40% towards the total return of the S&P 500 Index. 

Below is our list of the best dividend ETFs in Canada.

Are Dividend ETFs Worth the Fees?

For the right investor, dividend-focused ETFs are worth the MERs that they charge for several reasons. 

Like most ETFs on the list below, 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.

Dividend ETFs are often structured to enhance tax efficiency, which reduces capital gains compared to traditional mutual funds.

ETFs can provide specialized exposure, enabling investors to target specific sectors, regions, or themes with precision.

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.

If you’re a hands-off investor looking for an easy way to diversify your investments at a low fee and earn income, dividend ETFs could be the perfect fit for you.

Downsides of Dividend ETFs

While dividend ETFs can be attractive for their income potential and diversification benefits, they also come with some downsides:

1. Expense Ratios: Even if they’re relatively low, the fees associated with dividend ETFs can eat into returns over time, especially when compared to owning individual stocks with no ongoing management fees.
2. Interest Rate Sensitivity: Dividend ETFs can be sensitive to changes in interest rates. When rates rise, dividend-paying stocks might become less attractive relative to bonds, leading to potential price declines.
3. Lack of Capital Appreciation: While dividend ETFs focus on income, they might not always prioritize capital appreciation. This could result in missed growth opportunities compared to broader market ETFs.
4. Dividend Sustainability: Not all dividends are sustainable. If an ETF is chasing high yields without considering the sustainability of those dividends, there’s a risk of dividend cuts which can negatively impact the ETF’s price.
5. Potential for “Yield Traps”: Some stocks have high yields because their prices have fallen due to business challenges. An ETF focused solely on high yields might inadvertently invest in these “yield traps,” risking capital depreciation.

Key Features to Consider For Dividend ETFs

Here are some of the primary factors to evaluate before choosing your dividend ETF:

• Yield: The yield is the annual dividend income an investor receives, expressed as a percentage of the ETF’s price.
• Management Expense Ratio (MER): MER contributes significantly to the total cost of holding an ETF. Try to choose ETFs with lower MERs, as this can save you money and potentially enhance your overall returns.
• Size and Liquidity: Larger ETFs often provide better liquidity, allowing easier trading at a lower cost. Evaluate the assets under management and the average daily trading volume of the ETF you want to purchase.
• High-yield vs. Dividend Growth: High-yield ETFs typically deliver higher income, while dividend growth ETFs focus on companies with the potential for consistent dividend increases.
• Risk Rating: Assess the risk rating of the ETF to ensure it aligns with your investment goals and risk tolerance. Lower-risk ETFs might provide more stability but limit return potential compared to higher-risk funds.
• Distribution Frequency: Take note of the ETF’s distribution frequency, which can be monthly, quarterly, semi-annually, or annually. Determine which payout schedule best suits your income needs.

By considering these key features, you can select a dividend ETF in Canada that best aligns with your investment objectives and preferences while striving for a strong, income-generating portfolio.

Best Dividend ETFs in Canada

• iShares Canadian Financial Monthly Income ETF (FIE.TO)
• iShares S&P/TSX Composite High Dividend Index ETF (XEI.TO)
• iShares Core MSCI Canadian Quality Dividend Index ETF (XDIV.TO)
• iShares Canadian Select Dividend Index ETF (XDV.TO)
• BMO Monthly Income ETF (ZMI.TO)
• BMO Canadian Dividend ETF (ZDV.TO)
• RBC Canadian Bank Yield Index ETF (RBNK.TO)

1. iShares Canadian Financial Monthly Income ETF

The iShares Canadian Financial is a 70-30 mix of other common shares and other ETFs. Roughly 70% is made up of common shares, mostly in banks, insurance, and other financial companies.

The remaining 30% is divided into two ETFs – one of which is made up of preferred shares of 176 Canadian companies (20% weight of the original ETF), and the other is corporate bonds (10% weight).

This breakdown allows the ETF to offer a distribution yield much higher than comparable financial ETFs are offering right now – over 7%  at the time of writing this (Nov 2023). It also offsets the inherent volatility of common shares and reduces the risk associated with exposure to a single sector.

With a Management Expense Ratio (MER) of 0.85%, the ETF is expensive, but the cost is justified due to its high yield and modest capital appreciation potential.

The fund has a medium risk rating despite offering exposure to a single sector and offers monthly distributions. The net assets under management are over $892 million, and the number of underlying holdings is massive – over 1,200, giving it a significant diversification edge.

Considering its past performance and current yield, it’s one of the best ETFs Canadians can invest in, and not just for the dividends.

Through the preferred share mix it allows Canadian investors to generate a solid monthly income from the financial sector at a level that would be nearly impossible to recreate by investing directly in the financial sector stocks, even if you are willing to take on a substantial amount of risk.

2. iShares S&P/TSX Composite High Dividend Index ETF

This ETF follows the performance of the S&P/TSX Composite High Dividend Index that’s rebalanced on a quarterly basis and offers you exposure to 74 Canadian dividend payers.

Thanks to the natural distribution of high-quality dividend payers in Canada, the holdings lean heavily towards energy and finance, with the two sectors making up over 60% of the total weight.

The top ten holdings include two telecom giants, three banks, four energy companies, and Fortis, all of which are established aristocrats, so even though the index is not exclusively aristocratic, they make up the bulk of its weight.

The index offers a healthy enough distribution yield – around 5.7% at the time of writing this, and the capital appreciation potential is quite decent and, to an extent, mimics the performance of the overall Canadian market (S&P/TSX).

It’s a low-cost ETF with MER at just 0.22% or $2.2 per $1,000 of income the fund generates for you. The diversification has led to an attractive medium-risk rating.

Thanks to its focus on high-yield giants from various industries, it’s a solid ETF for dividends, but you should take its over-exposure to the energy and financial sector.

If both sectors go bearish at once, it may erode your capital tied to this ETF at an alarming rate. However, the risks of its payouts being slashed are relatively minimal.

3. iShares Core MSCI Canadian Quality Dividend Index ETF

If you are looking for a more financially leaning but still adequately diversified ETF, this might be the right pick for you. It tracks the Core MSCI Canadian Quality Dividend Index, made up of just 18 holdings.

Financial sector companies are over-represented, making up close to 50% of the weight of the fund. Energy, utilities, and telecom cover the remaining, with around five percent remaining for other sectors and cash.

However, its top holdings include some of the most trusted dividend stocks in Canada, including Fortis, Manulife, three banks, and Telus. So, even with a limited number of holdings and a heavy lean on the financial industry, the ETF cannot be classified as under-diversified.

It offers a yield relatively similar to the above-discussed XEI ETF (with a distribution yield of around 5%), but the growth potential is significantly better, at least considering the performance in the last five years.

It’s also very cost-effective, with an MER of just 0.11%, so you would pay around $1.1 a year for every $1,000 you get from this ETF.

The only chink in this ETF’s armour is that it leans too heavily towards the financial sector, but there is adequate diversification among its financial holdings, and the performance, yield, and MER combo make it a compelling pick if you are looking for dividend ETFs.

4. iShares Canadian Select Dividend Index ETF

Calling this ETF a slightly more powerful version of the iShares Core MSCI Canadian Quality Dividend Index ETF (discussed above) wouldn’t be a mischaracterization.

It’s a more expensive version offering a slightly higher yield and a more powerful growth potential (and more diversification).

The fund is made up of 30 holdings, most of which are dividend aristocrats, though not all. Over half of the index (by weight) is made up of financial sector holdings, followed by utilities and telecom.

The energy sector only makes up about 8% of the weight, which is one of the things that differentiate this ETF from whole-market ETFs or ETFs that expose you to the dividend-heavy weights of the market.

At the time of writing this, the ETF is offering a mid-5 % yield, and if you had reinvested the dividends, the ETF would have grown your $5,000 investment to around $6,700 by now (Nov 2023). It comes with a relatively higher MER of 0.55% and a medium risk rating.

If you are cost-sensitive, the ETF may look far more expensive compared to most others on this list, but it’s important to analyze this cost from the context of its return potential, where it excels.

5. BMO Monthly Income ETF

After so many BlackRock ETFs, a BMO ETF offers a nice change of pace. It’s a small, low-cost ETF.

There are just around $102 million in Assets Under Management (AUM), and the MER is at 0.2%. It’s also lower risk than most other ETFs on this list, with the risk classification at low-to-medium (Two on a one-to-five scale).

What makes it even more different from others on this list is that it’s an ETF made up of other ETFs, nine of them to be exact. All of them are BMO ETFs, and one of them is a covered call ETF, which makes up about 15% of the total weight.

It’s quite well diversified, not just from the perspective of the underlying companies (and their sectors and industries) but also from a geography and asset class perspective.

Companies from the US and Canada represent about 70% of the weight, with the rest coming from other regions. Over one-third of the ETF is made up of bonds.

However, this hasn’t necessarily weighed the ETF down, performance-wise, and it has resulted in a decent distribution yield – 5.5% at the time of writing this. The distributions are monthly.

Even if covered call ETFs are not your cup of tea, this ETF is worth considering. The volatility and risk that covered call ETFs add might be offset by the corporate bonds held in one of the underlying ETFs.

6. BMO Canadian Dividend ETF

BMO Canadian Dividend ETF is made up of 52 holdings, with financial and energy companies making up about 60% of the sector’s weight, though the financial sector is overrepresented, which is a common theme in Canadian dividend ETFs. The top ten holdings include four banks, two telecoms, and two energy giants.

It’s a pure-play Canadian ETF with all 52 companies hailing from Canada. Still, the sector-wide diversification is enough to get it a medium-risk rating. The MER is a bit on the high side at 0.39%.

The ETF makes monthly distributions. Its performance has been quite decent in the last ten years, and at the time of writing this, the ETF is offering distributions at a yield of about 4.7%.

It wouldn’t be a stretch to consider this ETF a slightly different version of BlackRock’s XDV, but it has a higher number of holdings and is better diversified. Over the last ten years, its performance has been slightly better, but if you are focused more on the yield, XDV would be a better pick.

7. RBC Canadian Bank Yield Index ETF

This RBC Canadian Bank Yield Index ETF aims to track the performance of the Solactive Canada Bank Yield Index. The two main guiding principles of this ETF are: focus on Canadian banks and leaning towards high-yield banks.

So, the fund is made up of just the big six Canadian banks and has about $227 worth of assets under management. However, the banks are disproportionately represented.

Currently, CIBC and Bank of Nova Scotia, the two highest-yielding Canadian banks, make up about 50% of the index, while Royal Bank and National Bank of Canada, the best growers in the sector, make up less than 17% combined.

So, if you want a more dividend-oriented exposure to Canadian banks, this is the ETF for you. It’s offering a distribution yield of about 5.8% at the time of writing this. The growth potential is not bad per se, but it could have been significantly better with an equal weight distribution exposure to the banks.

It’s a relatively low-cost ETF, with an MER of 0.32%, so if you make $1,000 in a year, only about $3.2 would go towards the fees. However, it carries a medium to high risk rating since it exposes you to a handful of constituents from a single industry.

Canadian banks have a solid history when it comes to dividends and financial stability, even in weak markets, and this ETF offers you sector-wide exposure to their dividends.

Frequently Asked Questions

What are the best options for U.S. dividend ETFs available in Canada?

Some good options to consider include the Vanguard U.S. Dividend Appreciation Index ETF (VGG), and the iShares U.S. High Dividend Equity Index ETF (XHU). These ETFs track U.S. companies with solid dividend track records.

Which Canadian dividend Aristocrats ETFs are popular among investors?

A popular ETF in this category is the iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (CDZ). This ETF provides exposure to a diversified group of Canadian companies with long-term dividend growth.

What are the top-performing international dividend ETFs for Canadians?

A popular international dividend ETF choice for Canadians is the Vanguard FTSE All-World ex Canada High Dividend Yield Index ETF (VI). This ETFs offer exposure to global equity markets with a focus on dividend-paying companies.

How to Buy the Best Dividend ETFs in Canada

The cheapest way to buy ETFs is from discount brokers. My top choices in Canada are:

To learn more, check out my full breakdown of the best trading platforms in Canada.

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.