The traded part is a bit of an anomaly for me because I don’t think you should trade these products once they are bought. So hold them long term for the best results. The reason you’d buy an ETF is because you want broad diversification and in the case of a dividend ETF for it’s monthly payout. So who offers the best product in the Canadian Market and what is the Best Canadian Dividend ETF?
Trying to call just one of these products the best is not that easy. We are all different types of investors and look at different metrics to decide what is best. What I think is best for me may not be what you consider best for you.
We have 4 ETFs that I am going to profile so we can make a balanced determination to see who qualifies as the best. The problem here is when you factor in cost, distribution yield, how many stocks and what is the exposure breakdown you will see some of the slight differences. Also another question you may ask yourself includes;Do you want a heavy exposure to financials or energy or do you want the highest yield to be the only reason you want to hold a particular ETF. I do not hold any of the ETFs I’m profiling here and I have not received any compensation for mentioning them.
ZDV – BMO Canadian ETF
Number of Holdings – 52
Yield – 4.29%
MER – .35%
Exposure – 35% Financials, 22% Energy
Total Dividend Yield After Cost = 3.94%
CDZ – CDN Dividend Aristocrats Index ETF
Number of Holdings – 75
Yield – 3.96%
MER – ..67%
Exposure – 23% Financials, 21% Energy
Total Dividend Yield After Cost = 3.29%
XDV – CDN Select Dividend Fund
Number of Holdings – 30
Yield – 3.92%
MER – .56%
Exposure – 59% Financials, 7% Energy
Total Dividend Yield After Cost = 3.36%
VDY – CDN High Yield Index ETF
Number of Holdings – 70
Yield – 2.67%
MER – .22%
Exposure – 61% Financials, 19% Energy
Total Dividend Yield After Cost = 2.45%
The Winner is
If we just go on who is going to give me the best dividend yield I would go with the BMO product. It is not too exposed to any one sector and has a very reasonable Management Expense Ratio (MER). What I did find surprising was just how low the payout was for the Vanguard ETF, and it’s extreme weighting in financials at 61%. This is supposed to be the lowest cost highest reward provider in the marketplace. I guess this does not include Canada because they have a long way to go to compete with ishares and BMO.
If you would like to purchase any of these ETFs each company has their own website and you can easily google the symbols I provided for each product.
Should You Even Buy a Dividend ETF
Compared to other investment products ETFs have not been around for very long. Most have only been around approximately 10 years. They seem to have become heavily promoted and sold in ever increasing amounts. Individual investors are drawn to them by their low cost and perceived safe diversification.
A lot of financial planners love these products because of the recurring annual management fees they can collect and the sales pitch of how simple they are to own. People are buying into this pitch in droves. Let’s take a look under the hood for a closer inspection.
You have to remember that people who manage money professionally are performance driven and use benchmarks to gauge that performance. They play the earnings game and buy and sell those stocks based on that. Individuals like you and me don’t need to chase performance or keep up with a benchmark. They also will on occasion throw in some high risk high yield stocks into the portfolio to chase yield.
They try to impress by offering a high yield. It doesn’t matter to them if some of the stocks they’ve packed into the ETF turn into losers. They will also rotate in and out of sectors keeping with the trade part of ‘T’ in ETF.
The other part of owning a Dividend ETF that’s disturbing for me, is the distribution yield. It almost never goes up. I’m retired so I watch what they’re going to pay me monthly. Your monthly income doesn’t grow with these products so it can’t keep up with inflation. You are much better off owning the stocks individually so you can take advantage and get paid when the company announces a dividend increase. You never get that with a Dividend ETF. It’s sucked up into its fee structure and you end up losing when they cut their payout ratio. You end up losing on both the growth of the stock and the income it provides. This is why I don’t own any Dividend ETFs.
I would rather own the stocks individually as part of a dividend growth portfolio. I’ll be writing more on that in future posts. I end up with the growth of the stock and all of the income it provides. I want to own stocks that have a payout that’s growing every year. This is how you stay ahead of inflation and keep the purchasing power of your future dollars. ETFs contain too many junk stocks and the supposed diversification sold to you does not eliminate risk. Pros will also tell you they can beat the market, most never do. They also will never pass on to you any increase in the stock’s distribution.
There is an ETF out in the marketplace that has paid out 6 cents a unit for the last 6 years in a row. Never a raise in 6 years. You are falling way behind the cost of living by owning that fund. They do call it a safe investment though, safe for who? sheesh!
I buy individual stocks and hold them long term for the growing income.
If you would like to purchase a book providing more detail on ETFs and how they work you can do so here
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