The Canadian ETF industry usually lags behind its U.S. counterpart in terms of sheer size (as based on assets under management, or AUM), but does occasionally pull ahead when it comes to the variety of offerings. A prime example is with the plethora of different Canadian dividend ETFs available.
Usually, investors categorize dividend ETFs based on their management style, which can range from passively tracking an index, targeting specific equity "factors" using a rules-based, "smart-beta" approach, or actively managed according to the fund manager's proprietary strategy.
However, I think a more useful way of categorizing and understanding Canadian dividend ETFs is via their objectives. That is, what is their overarching goal? To get a sense of this, I used the Cboe ETF Screener to search for dividend ETFs. Here's how I would categorize my findings.
High-yield dividend ETFs
High-yield dividend ETFs are the first category I encountered. These ETFs are specifically designed to deliver substantial, above-average present income returns to investors without the use of derivative strategies like covered calls. Usually, their name specifies "high-yield" or "high-dividend", but the only way to know for sure is to read their prospectus.
To achieve this goal, these ETFs invest in high-dividend-yielding stocks. This means holding mature and value-oriented companies that have historically paid out or are expected to pay out a large portion of their earnings as dividends. Such companies might span various sectors but typically include utilities, real estate, energy, and financials to name a few.
Overall, high-yield dividend ETFs can be an attractive investment avenue for those who prefer an income-centric investment strategy and are less concerned with overall capital appreciation and total returns. The following Canadian high-yield dividend ETFs are available:
- Vanguard FTSE Canadian High Dividend Yield Index ETF (VDY): 0.21% expense ratio, $2 billion AUM.
- iShares Core S&P/TSX Composite High Dividend Index ETF (XEI): 0.22% expense ratio, $1.4 billion AUM.
- Vanguard FTSE Developed ex North America High Dividend Yield Index ETF (VIDY): 0.30% expense ratio, $94 million AUM.
- Horizons Canadian Utility Services High Dividend Index ETF (UTIL): 0.50% expense ratio, $6.5 million AUM.
- iShares U.S. High Dividend Equity Index ETF (XHU): 0.34% expense ratio, $188 million AUM.
- Fidelity Canadian High Dividend Index ETF (FCCD): 0.39% expense ratio, $177 million AUM.
- Fidelity U.S. High Dividend Index ETF (FCUD): 0.39% expense ratio, $175 million AUM.
Dividend growth ETFs
Dividend growth ETFs take a slightly different approach. Rather than focusing solely on the highest current yield, these funds invest in companies that have a proven record of consistently increasing their dividends over time. Usually, their name includes "dividend growth", "dividend appreciation", or "dividend aristocrat", but again, investors should check the prospectus.
The companies tracked by these ETFs are often characterized by strong balance sheets, reliable cash flows, and a history of steady earnings growth, all of which contribute to their ability to increase dividends consistently. There may also be a requirement for companies to have a certain number of years of consecutive dividend growth.
Overall, while these ETFs might not offer the highest yields right away, they provide the potential for both income growth and capital appreciation over the long term. These ETFs could be an attractive option for investors interested in a blend of income and growth investing.
- iShares U.S. Dividend Growers Index ETF (CUD): 0.66% expense ratio, $376 million AUM.
- Vanguard U.S. Dividend Appreciation Index ETF (VGG): 0.30% expense ratio, $1 billion AUM.
- iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (CDZ): 0.66% expense ratio, $907 million AUM.
Dividend quality ETFs
The third category are dividend quality ETFs. As their name suggests, these ETFs focus on the quality of the dividend-paying companies. These ETFs favor companies that are financially healthy and have a sustainable dividend payout policy. Their screeners may consider factors like company profitability, debt levels, cash flow stability, and earnings predictability.
The goal of these ETFs is to provide exposure to companies that are likely to continue paying and possibly increasing dividends in the future. Therefore, these ETFs can offer more stability and lower risk than ETFs focusing solely on high yield or dividend growth.
Overall, dividend quality ETFs can be a good choice for investors who want a balanced approach to dividend investing, focusing on both current income and future dividend sustainability. Here are some of the options trading on the Canadian market:
- Franklin Global Dividend Quality Index ETF (FLGD): 0.37% expense ratio, $10 million AUM.
- iShares Core MSCI Canadian Quality Dividend Index ETF (XDIV): 0.11% expense ratio, $806 million AUM.
- iShares Core MSCI Global Quality Dividend Index ETF (XDG): 0.22% expense ratio, $285 million AUM.
Hybrid Strategies
Finally, there are dividend ETFs that blend components from two or more of the high-yield, growth, and quality categories. For instance, a dividend ETF has both a high-yield and quality focus, or a growth and category focus. These ETFs allow dividend investors to diversify their exposure among more types of dividend stocks in a single ticker.
However, their name isn’t always intuitive, so make sure you double-check the prospectus to understand what the strategy is. Here are some of the Canadian listed options:
- CI WisdomTree U.S. Quality Dividend Growth Index ETF (DGR.B): 0.38% expense ratio, $146 million AUM.
- CI WisdomTree International Quality Dividend Growth Index ETF (IQD.B): 0.54% expense ratio, $110 million AUM.
- CI WisdomTree Canada Quality Dividend Growth Index ETF (DGRC): 0.23% expense ratio, $520 million AUM.
- BMO (TSX:BMO) US Dividend ETF (ZDY): 0.33% expense ratio, $445 million AUM.
- BMO Canadian Dividend ETF (ZDV): 0.39% expense ratio, $956 million AUM.
- iShares Canadian Select Dividend Index ETF (XDV): 0.55% expense ratio, $1.6 billion AUM.
This content was originally published by our partners at the Canadian ETF Marketplace.