The Best Canadian Dividend ETFS for Income on Autopilot

In today’s markets, investing in a high-quality basket of stocks has never been easier, especially for those just learning how to invest.

The popularity of exchange traded funds (ETFs) has made it so that even the most novice investor can reap the rewards of a bull market. Heck, even some ETFs are used solely to exchange CAD to USD while paying the least amount of fees.

You might also be surprised to know that there are plenty of Canadian Dividend ETF options for those seeking income on autopilot, including ETFs that are laser focused on Canada’s banks.

Most of Canada’s Dividend ETFs are dominated by financials

This is not all that surprising as the financial industry accounts for over 30% of the TSX Index.

The financials are further concentrated towards Canada’s Big Banks. Considering they have been paying uninterrupted dividends for over 100 years, including them as the backbone of a dividend ETF in Canada is probably a smart move.

It is important to make note of these weightings. If you decide to hold a basket of ETFs in an effort to diversify your holdings, it is important not to double up on ETFs that offer the same exposure to Canada’s Financial Services sector.

If you’re looking for wider exposure, you may want to consider these Canadian REIT ETFs, which expose you to the real estate sector without physically having to own it.

With that in mind, here are the top Canadian Dividend ETFs heading into 2020. If you’re looking more so for ETFs that track broader indexes, check out our list of the top Canadian index funds.

Horizons Active CDN Dividend ETF (TSX:HAL)

Top 10 Holdings

wdt_IDCompanyWeight
1Enghouse Systems (ENGH)5.58
2Enbridge (ENB)5.09
3Constellation Software (CSU)5.08
4Open Text Corp (OTEX)4.84
5Brookfield Infrastructure (BIP.UN)4.47
6Royal Bank of Canada (RY)4.27
7BCE Inc (BCE)3.96
8Telus Corp (T)3.64
9TD Bank (TD)3.63
10Bank of Montreal (BMO)3.46

As a smaller ETF, Horizons Active CDN Dividend ETF isn’t as well known as its larger peers.

It is an actively managed ETF that invests in North American dividend paying companies. Although it does have small exposure to Latin America stocks (just over 4%), the majority (95%) of its holdings are TSX-listed companies.

It has net assets of $56.69 million and pays out a quarterly dividend that currently yields 3.82%. HAL has a moderate risk profile and MER fees of 0.55%.

Despite its small stature, it has been one of the best performing ETFs in the country. In fact, this ETF was outperforming the TSX on a fairly consistent basis prior to COVID-19. Scroll down a bit to see its overall dividend adjusted performance over the last 5 years when compared to the index.

Since inception (2010), it has returned 7.6% annually. In 2020, the ETF is down 12.11%, lagging the TSX Index which is down 3.7%. We can attribute most of this outperformance by the index to material companies, particularly gold miners.

Furthermore, the ETF has outpaced the Canadian Dividend Equity Index in the past one, three and five-year time-frames.

What is particularly attractive about HAL, is that it is one of the more diversified ETFs and one of the few in which financials do not dominate.

The top-weighted sector is Utilities (21.58%) and Financial Services account for only 18.3% of holdings. As you’ll see, two of the top 3 holdings in this portfolio are actually tech options, Enghouse Systems and Constellation Software.

No stock accounts for more than 5.6% of holdings and the top 10 account for 44% of total net assets.

All told, Horizons is an attractive Canadian dividend ETF for those looking for a well-balanced portfolio and one whose primary focus is not Financial Services.

HAL 5 year dividend adjusted performance vs the TSX Index

HAL 5 year performance vs TSX Index
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BMO Canadian Dividend ETF (TSX:ZDV)

Top 10 Holdings

wdt_IDCompanyWeight
1Enbridge (ENB)3.22
2Bank of Nova Scotia (BNS)3.20
3BCE Inc (BCE)3.20
4Telus Corp (T)3.15
5Emera Inc (EMA)2.99
6Sun Life Financial (SLF)2.99
7CIBC (CM)2.91
8Royal Bank of Canada (RY)2.87
9Power Corporation of Canada (POW)2.69
10Rogers Communications (RCI.B)2.69

The BMO Canadian Dividend ETF seeks to provide exposure to the performance of a yield-weighted portfolio. It also targets companies that have the potential for long-term capital appreciation.

ZDV has net assets of $416.97 million and pays out an attractive monthly dividend that currently yields 5.57%.

It is important to note that this BMO ETF is among the most volatile in the Canadian Dividend & Income Equity category. This makes sense since it is targeting higher-yield stocks.

ZDV’s holdings closely resemble that of the TSX Index weightings. Financial Services account for 32.94% which is almost double that of the Energy sector which accounts for 16.04% of the portfolio.

Although Materials and Industrials account for 11.6% and 11.2% of the TSX Index, they only account for 2.25% and 7.49% of ZDV’s overall holdings.

Making up for that shortfall is the Utility sector which accounts for 14.68% of holdings versus its 4.4% TSX Index weighting. All other industries are inline with TSX Index sector weightings.

Even though no single stock accounts for more than 3.5% of holdings, the top 10 holdings have a heavy telecom and utility presence (5 of 10 holdings.) The largest holding is Enbridge (TSX:ENB) at 3.22%.

As you’ll see with the performance chart below, ZDV has lagged the returns of the TSX Index since early 2018, and the March crash in 2020 due to COVID-19 has caused it to lag significantly.

ZDV 5 year dividend adjusted performance vs the TSX Index

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S&P/TSX Canadian Dividend Aristocrats Index Fund (TSX:CDZ)

Top 10 Holdings

wdt_IDCompanyWeight
1TransAlta Renewables (RNW)2.54
2Transcontinental (TCL.A)2.48
3Fiera Capital (FSZ)2.46
4The North West Co (NWC)2.40
5Enbridge (ENB)2.26
6BCE Inc (BCE)2.25
7Choice Properties REIT (CHP.UN)2.12
8CIBC (CM)2.09
9Capital Power Corp (CPX)2.05
10Granite REIT (GRT.UN)2.03

Did you know, there is only one Canadian ETF that currently tracks Canada’s Dividend Aristocrats?

In comparison, there are 10 funds south of the border that track the U.S. Aristocrats in some way. Aristocrats are stocks that have a history of raising their dividends for at least five consecutive years.

The fund seeks to replicate the investment of the S&P/TSX Canadian Dividend Aristocrats Index. To be included in the Index, stocks must have a market cap of at least $300 million. There are currently a whopping 82 stocks in the portfolio.

The fund has MER fees of 0.60% and pays out a monthly dividend that currently yields 5.22%. It has net assets of $728.8 million, which makes it one of the largest ETFs on our list. CDZ has a moderate risk profile.

In 2019, it tracked the performance of the broader TSX Index (+19%) and it has outperformed the Canadian Dividend & Income equity category average over the past three, five and ten-year periods. Over the past 10 years it has averaged a compound annual return of 6.25%.

The Aristocrat fund is a well-balanced ETF with only one sector (financials) accounting for more than 20% of holdings. Other than that, most sectors are in the 9-14% range.

The Top 10 holdings are quite interesting and outside of the norm.

They account for only 22.68% of holdings and no stock accounts for more than 2.6% of holdings. TransAlta Renewables (TSX:RNW), a Canadian renewable energy company, is the top holding, followed closely by Transcontinental Inc (TSX:TCL.A) neither of which make the top 10 in any of the other funds covered. Likewise, the top banking stock is Canadian Imperial Bank of Commerce (TSX:CM) which is also a rarity.

This ETF is a great option for investors looking for a wider variety of stocks, and those seeking to replicate the performance of the Canadian Dividend Aristocrats.

In terms of performance however, this is an ETF that has struggled to keep up with the index. As you’ll see with the chart below the ETF has consistently lagged the TSX in terms of overall returns, and this has been amplified even more by the COVID-19 crash in March of 2020.

CDZ 5 year dividend adjusted performance vs the TSX Index

Dividend Aristocrat index fund CDZ vs TSX Index 5 year
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iShares Core S&P/TSX Composite High Dividend Index ETF (TSX:XEI)

Top 10 Holdings

wdt_IDCompanyWeight
1Pembina Pipeline Corp (PPL)5.11
2Royal Bank of Canada (RY)5.10
3Enbridge (ENB)4.96
4TC Energy (TRP)4.96
5Toronto Dominion Bank (TD)4.96
6Telus Corp (T)4.92
7Bank of Nova Scotia (BNS)4.88
8BCE Inc (BCE)4.87
9Canadian Natural Resources (CNQ)4.83
10Nutrien (NTR)4.24

The iShares Core S&P/TSX Composite High Dividend Index ETF is geared towards high-yield seekers.

It aims to replicate the S&P/TSX Composite High Dividend Index which is comprised of approximately 50-75 stocks that are selected based on yield. Each Index constituent is capped at 5% weight and no sector can account for more than 30% of holdings. As of writing, the ETF will likely go through a bit of rebalancing, as some of its holdings do exceed the 5% and it currently has a 31% weighting towards the financial and energy sectors.

This high-yield ETF pays out its dividend monthly and at 0.20%, has one of the lowest MER fees. This is probably the fund’s most attractive feature.

It has $566.13 million in assets and currently yields 6.23%. The fund slightly underperformed the TSX Index in 2019 (+16.90% vs +18.77%) and has averaged only 1.23% over the last 5 years.

So, why the underperformance? Well for one, the ETF actually had much better average returns prior to the COVID-19 crash in March of 2020. However, due to its heavy weighting towards energy and financial stocks, which have severely lagged in terms of overall recovery, it’s not surprising this ETF has underperformed. If you notice in its top 10 holdings above, 7 out of 10 come from one of these two sectors. In current market conditions, this is not a good mix.

However, once financials do recover we expect this dividend ETF to do better. However,  if you are looking for diversification, this is not the ETF for you.

Likewise, the portfolio is also heavily weighted towards the Top 10 which account for 48.83% of assets.

Despite the 5% Index cap, the are two stocks that currently account for more than 5% of holdings. Among the Top 10, you will see several of the largest blue-chip companies in Canada. From Enbridge (TSX:ENB) to BCE (TSX:BCE), to the Bank of Nova Scotia (TSX:BNS), the top 10 is a “who’s who” of the best blue chip stocks in Canada.

However, considering those blue chips are currently in industries that are struggling, the ETF may struggle moving forward as well until economic outlook picks up.

XEI 5 year dividend adjusted performance vs the TSX Index

 

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iShares Canadian Select Dividend Index ETF (TSX:XDV)

Top 10 Holdings

wdt_IDCompanyWeight
1CIBC (CM)8.28
2Canadian Tire Corp (CTC.A)6.59
3Royal Bank of Canada (RY)6.43
4Bank of Montreal (BMO)6.10
5Bank of Nova Scotia (BNS)5.09
6BCE Inc (BCE)4.79
7TC Energy Corp (TRP)4.66
8Toronto Dominion Bank (TD)4.54
9National Bank of Canada (NA)4.19
10Emera (EMA)3.64

iShare has another twist for those seeking a higher yield.

The iShares Canadian Select Dividend Index ETF seeks to replicate the performance of the 30 highest yielding, dividend-paying companies in the Dow Jones Canada Total Market Index.

Constituents are selected by Dow Jones using a rules-based methodology including an analysis of dividend growth, yield and average payout ratio.

The fund is the largest ETF on our list with net asset value of $1.14 billion. It has MER fees of 0.50%, pays a monthly dividend and currently yields 5.77%.

In 2019, the fund tracked the TSX Index (+18.73%) and outperformed its Canadian Dividend & Income Equity fund peers (+15.10%). In fact prior to the March 2020 crash, it had outperformed its peers over the past one, three and ten-year timeframes. That performance has stalled, due to its heavy weighting in financials, but the ETF still has a very respectable 10 year average return of around 6%.

Much like its high-yielding XEI peer, XDV has a higher-than-average risk profile. This is where the similarities end as XDV has no weighting caps and it shows. The Financial Services sector accounts for a whopping 58.92% of holdings! It is close to being a Financial Services pure-play.

The Communications Services (10.98%) and Utilities (12.16%) sectors make up the bulk of the remaining 41% with no other sector accounting for a double-digit weighting.

Likewise, the top 10 holdings account for 54.31% of the portfolio. The top holding, Canadian Imperial Bank of Commerce (TSX:CM) accounts for 8.28% of the portfolio. Seven of the top 10 holdings are banks and the collectively, the Big 5 banks account for 30.44% of the portfolio.

If you are looking for a highly concentrated ETF that is laser focused on the big banks, look no further.

XDV 5 year dividend adjusted performance vs the TSX Index

XDV 5 Year Dividend Adjusted Return TSX