We have seen the advantages of investing in dividend stocks. These companies allow you to generate a steady stream of dividend income as well as benefit from long-term capital gains. The current low interest rate environment makes dividend stocks all the more attractive as bond yields are unlikely to beat rising inflation rates.
However, it’s quite difficult to identify companies with strong fundamentals that will enable them to pay and increase dividends over the long-term. As dividends are part of a company’s profits, you need to add stocks that are able to derive a steady stream of cash flows across business cycles.
Further, the ideal dividend paying company needs to have a sustainable payout ratio as it should have enough room to reinvest a portion of its profits and increase its base of cash generating assets which in turn will support dividend increases going forward.
It shows us that identifying dividend stocks is not an easy process. Alternatively, income investors can look to purchase exchange-traded funds or ETFs that have attractive dividend yields. Investing in ETFs will lower your risk by a considerable margin as it will provide you exposure to a basket of stocks across multiple sectors.
Here, we look at three such Canadian ETFs that have a forward yield of over 3%.
Vanguard FTSE Canadian High Dividend Yield Index
The Vanguard FTSE Canadian High Yield Index ETF or VDY aims to track the performance of a broad Canadian equity index that measures the return of companies characterized by a high dividend yield.
It is a passively managed fund and its replicated index strategy will provide you with exposure to large-cap, mid-cap and small-cap Canadian stocks across all industries. The VDY fund was launched in November 2012 and it has delivered annual returns of 9.53% since inception. It means a $10,000 investment in this fund back in November 2012 would be worth close to $21,630 at the end of May 2021.
The VDY ETF will give you exposure to 40 TSX stocks and its top 10 holdings with their respective index weights include:
- Royal Bank of Canada: 13.9%
- Toronto-Dominion Bank: 12.7%
- Enbridge: 7.97%
- Bank of Nova Scotia: 7.86%
- Bank of Montreal: 6.17%
- TC Energy: 4.94%
- Canadian Imperial Bank of Commerce: 4.72%
- Manulife Financial Corp: 4.32%
- BCE Inc: 3.85%
- Canadian Natural Resources: 3.58%
The ETF has a forward yield of 4.07% which means a $10,000 investment in the fund will help you generate $407 in annual dividends.
This ETF has a high exposure towards the Canadian banking and energy sectors that account for over 80% of its total holdings.
BMO Canadian Dividend ETF
The BMO Canadian Dividend ETF or ZDV aims to provide investors exposure to a weighted portfolio of Canadian dividend paying stocks. The ETF utilized a rules-based methodology where it considers the company’s three-year dividend growth rate, yield and payout ratio to invest in equities. The underlying portfolio is then rebalanced every June and December.
The ETF is managed by BMO Global Asset Management and is designed for investors looking for income and growth solutions. The ZDV fund was launched in October 2011 and it has delivered annual returns of 7.1% since inception. It means a $10,000 investment in this fund back in October 2011 would be worth close to $20,000 at the end of May 2021.
The ZDV ETF will give you exposure to 52 TSX stocks and its top 10 holdings with their respective index weights include:
- Royal Bank of Canada: 4.98%
- Bank of Nova Scotia: 4.97%
- Enbridge: 4.96%
- Toronto-Dominion Bank: 4.88%
- BCE Inc: 4.86%
- Canadian Imperial Bank of Commerce: 4.79%
- TC Energy: 4.03%
- Telus: 3.99%
- Canadian National Railway: 3.98%
- Bank of Montreal: 3.94%
Here too, the largest two sectors are financials and energy that account for over 50% of the fund. The other major sectors include Utilities (11.93%), Communications (11.15%) and Industrials (8.23%).
The ZDV has a forward yield of 4.33% which means a $10,000 investment in the fund will help you generate $433 in annual dividends.
iShares Canadian Select Dividend Index ETF
The iShares Canadian Select Dividend Index ETF or XDV will give you exposure to 30 of the highest yielding Canadian companies. This ETF is ideal for investors looking to generate a monthly income as it has a monthly payout.
The XDV ETF seeks to replicate the performance of the Dow Jones Canada Select Dividend Index. The fund was launched in 2005 and it has generated average returns of 6.85% per year since its inception.
As of June 7, 2021, the XDV ETF has a forward yield of 3.84% which means a $10,000 investment in the fund will help you generate $384 in annual dividends.
The top 10 holdings of the ETF with their respective forward yields include:
- Canadian Imperial Bank of Commerce: 8.64%
- Canadian Tire: 6.9%
- Bank of Montreal: 6.28%
- Labrador Iron Ore Royalty Corp: 6.02%
- Royal Bank of Canada: 5.96%
- TC Energy: 4.88%
- Bank of Nova Scotia: 4.69%
- BCE Inc: 4.69%
- Toronto-Dominion Bank: 4.36%
- National Bank of Canada: 3.88%
The financial sector accounts for 54% of the ETF followed by Communications and Utilities at 11.4% and 11.38% respectively.
The bottom line
We have seen that most of the ETFs are tilted towards banks, utilities, communications and energy sectors. However, investors should also note that the largest Canadian companies are part of these mature industries that allow them to generate cash flows across economic cycles.