The Best Canadian Dividend ETF (2023) - Another Loonie (2024)

Have you decide that you want to be a dividend investor and are looking for the best Canadian dividend ETF? Well, look no further. In this article, I’ll share what I believe to be the best dividend ETFs for Canadians. Depending on your situation, one of these dividend ETFs will be the perfect fit for your portfolio. Let’s get started!

Dividend Investing Made Easy

Building a dividend-focused portfolio can be time-consuming. The usual strategy is to construct a watch list of companies that pay good dividends (usually in the 3-4% range). You filter out companies whose dividends are too high a percentage of their earnings and companies that don’t typically raise their dividends. Next, you buy into whichever companies you feel are fairly valued and offer a good yield. Over time you slowly add to your portfolio, selectively investing in companies on your watch list. This strategy requires you to learn about the companies you’re following. It also requires some skill as you try to judge when they’re a good buy and when you need to let others go.

If you don’t have the time or familiarity with stock investing fundamentals, there’s an easier way to create a diversified portfolio of quality dividend stocks. Doing so is as easy as picking one of the many dividend ETFs from our friends at iShares, Vanguard, and their competitors. There are dividend-focused ETFs that track broadly diversified markets, earn you international exposure, and give you close to the same diversification as broad market ETFs. Thanks to these products, there’s never been an easier time to become a dividend investor!

Finding the Best Canadian Dividend ETF

The first thing you should consider when researching dividend ETFs is their Management Expense Ratio (MER). You don’t want to invest in a dividend ETF just to have much of its income reduced by a high MER. Generally, dividend ETFs that are focusing on a specific market tend to have higher MERs. A good example of this is the Horizons China High Dividend Yield Index ETF (HCN). This fund’s MER comes in at 0.97%, which is far higher than that of a regular diversified index ETF.

The next important thing to consider is diversification. If you want to invest in U.S. companies, doing so through a dividend ETF means many companies will be left out of your portfolio. Having a dividend-focused portfolio will also mean that you might be overweight certain sectors. In Canada, most of the dividends are paid out by financial, energy, utilities, and telecommunication companies. As a result, the Canadian part of your dividend-focused portfolio may be overweight these sectors. That might not be a bad thing, but it’s important to at least be aware that your portfolio may be less diversified if you focus too heavily on dividend-paying companies.

Lastly, it’s important to consider how a fund’s assets may expose you to withholding taxes on your dividends. Luckily, this isn’t a problem for Canada-focused dividend ETFs, which only invest in Canadian equities.

The Best Canadian Dividend ETFs

You’ve probably never heard of the funds I consider to be the best dividend ETFs for Canadians. Each have their pros and cons, but their low MERs and great yields make them excellent additions to any portfolio.

XDIV ETF Review

For many investors, the best Canadian dividend ETF is a relatively new offering from iShares.Started in 2017, the iShares Core MSCI Canadian Quality Dividend Index ETF (XDIV) tracks the MSCI Canada High Dividend Yield index. By tracking this index, XDIV focuses on well-established companies with above average dividend yields and great track records of increasing their dividends over the long term.

There’s a lot to like about XDIV. First of all, it’s unique for a Canadian dividend ETF in that itsMER is only 0.11%.That’s comparable to many broad market Canadian ETFs like the iShares Core S&P/TSX Capped Composite Index ETF (XIC), which has a MER of 0.06%. Another impressive attribute of XDIVis that it yields 5.22%. This yield is on the top end for a dividend ETF not overly focused on high-yield companies. Like the other ETFs on this list, XDIV’s dividends are paid monthly, which is one of the main draws for investing in dividend ETFs.

The only problem with XDIV is its lack of diversification. Atonly 20 holdings, XDIV is the least diversified ETF on this list. Worse, its assets areheavily concentrated in financial institutions, which account for over 50% of its assets. Compare this to XIC which invests about half as much in the financial sector. Despite these negatives, the ability to earn sizable dividend returns with such a low-cost ETF is an incredibly attractive proposition. It’s the reason why our portfolio has about half of our Canadian equity assets invested in XDIV.

XEI ETF Review

I consider the iShares S&P/TSX Composite High Dividend Index ETF (XEI) to be the second, or depending on your situation, the best Canadian dividend ETF. XEI is the ideal fund for anyone looking to invest their entire Canadian allocation in dividend-paying stocks. It strikes the right balance between low MER and high diversification for a Canadian dividend ETF. Tracking the S&P/TSX Composite High Dividend Index, XEI has attracted over$641 million in assetssince itsinception in 2011. Don’t let its name fool you, the index XEI tracks is focused on established, profitable companies with long dividend track records. It is not focused on risky “high-yield” companies – its top holdings are Royal Bank of Canada, Telus, and BCE Inc.

XEI has a reasonableMER of 0.22%and pays amonthly distributioncurrentlyyielding 5.25%annually. It does this while investing in 75 Canadian companies, which is far more than its sister fund XDIV. Its top sectors include 29% financials, 28% energy, 14% utilities, and 11% communication. This great allocation allows you to be reasonably diversified across the Canadian market while being able to focus on well-paying dividend companies.

VDY ETF Review

In 2012 Vanguard tossed its hat into the ring to compete for the title of the best Canadian dividend ETF. Its entrant is the Vanguard FTSE Canadian High Dividend Yield Index ETF (VDY), which has since attracted over$600 million in assets. Vanguard is committed to having some of the lowest management expense ratios in the industry and VDY is no exception with itsMER of just 0.22%. VDY tracks the FTSE Canada High Dividend Yield Index and seeks to invest in great dividend paying companies across all industries. Doing so has allowed VDY to build an attractive portfolioyielding 5.42% monthly.

It’s clear that VDY was designed to compete directly with the iShares S&P/TSX Composite High Dividend Index ETF. Both funds yield about the same and both share an equally low 0.22% MER. VDY is a little less diversified with only45 holdings, with its top sectors being58% financials, 24% energy, and 9.5% telecommunication. For those not worried about being overweight financials, VDY can be a great, low-cost investment that allows you to accumulate dividends must faster than your typical broad market Canadian equity ETF.

ZDV ETF Review

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The Bank of Montreal offers what I consider to be the fourth best dividend ETF for Canadians.Started in 2011, the BMO Canadian Dividend ETF (ZDV) focuses on the three year dividend growth rate, current dividend yield, and the payout ratio to determine which companies to invest in. This strategy is quite similar to what your typical dividend investor would do when selecting which individual companies to own.

What I like about ZDV is its competitive MER – for a Canadian dividend ETF – of 0.38%. I also like that it makes up for some of the diversification issues that XDIV has. It does this by investing in more companies, with52 total holdings. What’s better is that these companies are farless concentrated in financials. Overall, ZDV has a sector weighing that’s quite similar to the Canadian market more broadly, with its top 3 sectors being financials (34%), utilities (17%), and energy (12%). ZDV also pays a competitive,monthly dividend,yielding 5.29%on$471 million in assets.

XDV ETF Review

The iShares Canadian Select Dividend Index ETF (XDV) is a unique ETF that invests in the 30 highest-yielding Canadian companies in the Dow Jones Canada Total Market index. Quite the popular strategy, considering it has accumulated over $1,600 million in assets since its inception in 2005. In fact, it is iShares’ oldest Canadian dividend ETF—impressive. In its list of holdings, you’ll find Canadian heavyweights like the Bano of Montreal, Canadian Imperial Bank of Commerce, and Canadian tire.

XDV is hard to fall in love with, however, with its above-average MER of 0.55%—very high for an ETF with just 30 holdings. Its dividend yield also isn’t that spectacular, with its yield projected to be 4.46% over the next 12 months. XDV does have one redeeming quality for investors looking for income, in that it pays out its dividend monthly.

CDZ ETF Review

The iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (CDZ) is another iShares fund. This ETF claims to focus on a famous group of companies known as “Dividend Aristocrats.” These are companies that have increased their dividend every year for at least 25 years—at least, that’s what most people consider as “Dividend Aristocrats”. In reality, CDZ invests in a much more inclusive group, targeting companies that have increased their dividends annually for just 5 consecutive years.

Established in 2006, CDZ’s dividend aristocrat strategy has helped it attract nearly $1 billion in assets. In total, CDZ invests in over 90 different Canadian companies, which makes it one of the more diversified Canadian dividend ETFs available. With CDZ’s dividend focus, it is projected to yield 4.14% over the next 12 months. But, unfortunately, its MER of 0.66% is higher than average, making it less competitive than other Canadian dividend ETFs.

Best Canadian Dividend ETF Comparison

Fundamentals

Looking at the fundamentals, we can see that each of these funds has a yield of over 4%. That means investing $10,000 would earn over $400 per year in dividends. Since each fund pays dividends monthly, you could use this income to offset monthly expenses like your phone or internet bill. This strategy is called building a “dividend snowball” and is one of the perks of dividend investing.

When comparing these funds, BMO’s Canadian Dividend ETF (ZDV) stands out as having an exceptionally high P/E. This can be attributed to ZDV’s “rules-based methodology” which is distinct from tracking an index (XDIV, XEI, and VDY all track indexes). As a result of this rules-based methodology, the fund has come to own more businesses with higher earnings multiples. This implies that ZDV is more growth-oriented than other dividend ETFs in Canada.

Sector Weightings

When looking at the sector weightings of each fund, it’s clear that XDIV is the least diversified; it has assets in only 4 of the 11 main sectors. XEI stands out for being the most invested in real estate, with 8% allocated to real estate investment trusts. None of the funds have a significant portion of their assets invested in technology, which is what we would expect for a Canadian-focused dividend fund.

Past Performance

Although past performance isn’t indicative of future results, it can be interesting to compare each fund’s recent performance. In 2021, Canadian dividend ETFs hit a home run and returned an incredible 25% or more. In 2022, results were less than stellar, with most of the funds delivering a negative return. XDV was by far the worst performer, losing 8.6%.

It’s tough to predict what 2023 will bring, but it’s hard to imagine these funds underperforming last year’s returns.

Common Canadian Dividend ETF Comparisons

Here’s a quick breakdown of the most common ETF comparisons I’m asking about.

XEI vs XDIV

When comparing XEI vs XDIV, both of these ETFs are quite competitive with one another. Their yields are similar, at 4.67% and 4.29%, respectively, and their MERs are both affordable, at 0.22% and 0.11%. However, the big difference is their number of holdings. If I were aiming to hold one of these as my sole Canadian holding, I would much rather prefer investing in XEI which boasts 75 holdings, whereas XDIV has just 21.

XEI vs VDY

XEI vs VDY is another exciting matchup. If you’re like me and invest primarily in Vanguard ETFs, you may consider VDY as the more attractive option for that reason alone. However, looking at their fundamentals, it seems like XEI is the better ETF. Primarily because it’s much more diversified than VDY, all for the same MER of 0.22%.

XDIV vs VDY

Comparing XDIV and VDY is another interesting exercise. As I said before, unless you’re holding VCN or some other Canadian assets, it’s hard to justify investing in XDIV—despite its amazingly low MER and solid dividend yield. For that reason, I think most people would prefer VDY as their Canadian dividend ETF of choice.

XEI vs XIU

XIU is the iShares S&P/TSX 60 Index ETF. Although it isn’t a dividend-focused ETF, it does yield a respectable 2.88%. This is low compared to the ETFs in this list but pretty average for a highly diversified ETF like XIU. When comparing XIU and XEI, it really comes down to what you’re looking for. Want dividends? Choose XEI. Want diversification? Choose XIU.

XCV vs XDIV

XCV is the iShares Canadian Value Index ETF. Unlike XDIV, XCV is not focused on high dividend-paying stocks. Instead, it invests in medium to large Canadian companies it expects to be undervalued. It just so happens that these companies tend to pay sizable dividends, with XCV expected to yield 2.58% in 2023. However, if you’re interested in even more dividends, XDIV is the correct choice.

Closing Thoughts

In my view, the best Canadian dividend ETF is either XDIV or XEI. However, both funds have certain tradeoffs, and so which fund you invest in will depend on your particular situation. For me, I prefer XDIV because I enjoy its especially low MER. I am not concerned with being under-diversified because I also hold Vanguard’s FTSE Canada All Cap Index ETF (VCN) in my portfolio. XEI might be a much better choice for anyone that would like to hold a single Canadian ETF in their portfolio. With XEI, you pay a little more in management fees, but what you gain is a well diversified Canadian ETF that more closely matches the sector allocation of the broad market.

Thanks for Reading!

Thank you so much for reading! If you’re interested in reading more, check out my article on the best dividend stocks in Canada or my review of the best preferred share ETF in Canada!