The 5 Best Dividend ETFs: Compound Your Money FASTER (2024)

A dividend ETF tracks an index consisting of dividend paying stocks. However, various dividend ETFs apply different dividend strategies.

For instance, a few funds select stocks based on their dividend yields, while some select based on market capitalizations or locations.

Investors especially those approaching retirement prefer investing in dividend ETFs as they can provide a regular stream of income, add diversification, minimize risk, and hedge against inflation.

Overall, a dividend ETF offers an easy way for investors to manage their portfolios as they track an index.

Why Consider A Canadian Dividend ETF

The number of Canadian dividend ETFs has been growing over the years. BlackRock Canada is one of the biggest portfolio managers in the country and manages some of the leading funds in the country.

Navigating the dividend ETFs does depend on what you are looking for. If you are strictly looking at income versus appreciation, your approach may be different.

Care should be taken while choosing an ETF based on its style, past performance, sector diversification and fees.

List of Canadian Dividend ETFs

Here is a quick performance summary but you can find the details below; the best performers have the largest exposure to financials.

It’s no surprise my portfolio has the largest exposure to financials.

Canadian ETFs Summary

Due to the nature of the Canadian stock markets, all Canadian Dividend ETFs have a high weightage of Financial and Energy sectors. The other prominent sectors are Industrials and Utilities.

Most of these dividend ETFs also invest in the Communications, Real estate and Basic Materials stocks to round up the ETFs.

The performance and cost details for each dividend ETF is outlined below for better comparative analysis. Keep on reading for more details on each dividend ETF.

Do note that the yield is not consistent across payments like many individual stocks, it can fluctuates based on the management of the ETF.

To find the best dividend ETF, we need to separate the ETF selection approach depending on your goals.

If you are looking for more income, you want to search for income ETFs. ETFs do not pay a dividend as it happens, it pays a distribution and it’s an important consideration for your taxes. Read all about the difference between dividends vs distributions.

If you are looking for growth with dividend stocks, your focus is not only the income or a high yield but a blend of growth and income.

Best 3 Dividend ETFs

As per the mention above, in this context, we assume a goal of some growth and some income.

Since most have a similar yield, we can pretty much ignore the yield which leaves the historical performance of the ETFs.

From those data points, we can conclude the 3 best Canadian dividend ETFs are VDY, PDC and ZDV.

I have discounted XDIV due to not having 5 years of data. The recent markets are skewing the performance and I prefer to have more data to invest for the long term.

VDY – FTSE Canadian High Dividend Yield Index ETF

FTSE Canadian High Dividend Yield Index ETF tracks the performance of the FTSE Canada High Dividend Yield Index, which consists of Canadian stocks having a high dividend yield.

The ETF has a large part of its holdings coming from the financials and energy sectors with over 60% and 20% weightage, respectively. All the top ten holdings of the fund comprise of financials and energy stocks.

PDC – Invesco Canadian Dividend Index ETF

Invesco Canadian Dividend Index ETF seeks to replicate the performance of the NASDAQ Select Canadian Dividend Index. Most Canadian companies in the portfolio are liquid with high yields and have a sound track record of growing dividends. The fund has a 95% exposure to Canada with the rest 5% being contributed by other countries.

ZDV – BMO Canadian Dividend ETF

BMO Canadian Dividend ETF seeks to provide unitholders exposure to the performance of a Canadian dividend-paying stock portfolio based on dividend yields. Stocks showing long-term growth are chosen considering their dividend growth, yield, and payout ratio. It offers monthly distributions.

The fund is more balanced with none of the stocks constituting more than 5% of the net asset value. BMO Canadian Dividend ETF has stocks from financials, energy, communication and utility sectors amongst its top six holdings.

Best 2 Income ETFs

When it comes to generating income from ETFs, multiple strategies come into play with ETFs such as covered call ETFs, or simply income ETFs.

These ETFs do not usually appreciate much in value. There is limited upward and downward movement on the price and the offset is a higher income compared with the Canadian dividend ETFs. Even if many of the holdings are the same.

The following ETFs are mostly covered call ETFs with dividend stocks. The idea is to create 2 streams of income from the dividend and the covered call. You can execute covered calls on your own but you usually need a minimum of shares.

Since what you receive from an ETF is not a dividend but a distribution, you want to maximize your income here and hold it in the proper investment account.

Now that we know the yield and the size of the ETFs, it’s time to assess the volatility. There are many new covered call ETFs but they are way too small to include and too recent to have any performance data.

The best income ETFs would have to be ZWB followed by ZWC. You might prefer ZWC due to the higher yield but it’s not that much to take a 4% hit on the total return.

ZWB – BMO Covered Call Canadian Banks ETF

BMO CaThe BMO Covered Call Canadian Banks ETF (ZWB) has been designed to provide exposure to a portfolio of Canadian banks while earning call option premiums.

This ETF offers what many DIY investors would attempt to do with their Canadian bank holdings to generate some extra income. Why not let the experts do it for you?

ZWC – BMO Canadian High Dividend Covered Call ETF

The BMO Canadian High Dividend Covered Call ETF (ZWC) has been designed to provide exposure to a dividend-focused portfolio, while earning call option premiums. The underlying portfolio is yield-weighted and broadly diversified across sectors.

Similar to ZWB but with many of the high-yield dividend blue chip stocks such as Enbridge or Telus.