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adviser picks

BMO’s Brian Belski makes the case that rising rates can be good for stocks if the economy plays along.Maksym Plotnikov/Getty Images/iStockphoto

With North American stock markets surging to record highs lately, investors might want to consider dividend exchange-traded funds rather than heading for the exits.

They provide a more conservative way to invest than buying individual stocks. Even if markets pull back, you still are paid dividends while waiting for a recovery. Some ETFs even offer monthly payouts. Should markets climb higher, you are still in the game to earn more money.

Be mindful, however, of what stocks and sectors the ETF tracks. If you own a lot of bank stocks, you might want to avoid funds with a heavy exposure to financials. Because the Canadian market is heavily focused on the energy and financial sectors, you might look at foreign-dividend ETFs.

Given current market conditions, we asked three investment professionals to give their top picks.

Tyler Mordy, co-chief investment officer of Hahn Investment Stewards

  • iShares S&P/TSX Equity Income ETF (XEI-TSX)
  • Management expense ratio (MER): Projected at 0.22 per cent
  • 12-month yield: 4.09 per cent

Fee-conscious investors might like this Canadian equity ETF now that the management fee has been slashed to 0.20 per cent from 0.55 per cent, Mr. Mordy said. This ETF, which offers a monthly payout, also caters to income-hungry investors because it invests in 75 of the highest-yielding companies in the S&P/TSX Composite Index. Individual stocks are capped at 5 per cent of the ETF, while any sector can reach only 30 per cent. Canadian equities still remain attractive, and are currently undervalued versus the S&P 500, he noted.

  • Vanguard Dividend Appreciation ETF (VIG-NYSE)
  • MER: 0.10 per cent
  • 12-month yield: 1.91 per cent

This ETF tracks U.S. stocks with a record of growing their dividends for at least 10 consecutive years. The fund's annual yield may just match yield of the S&P 500, but investors still have more confidence in businesses "that signal to the market the strength of their cash flows through increasing dividends," Mr. Mordy said. "Companies with higher yields but more volatile cash flows will have their shares punished if they are unable to maintain dividend levels." The ETF's top holdings include Johnson & Johnson, Coca-Cola and Exxon Mobil.

  • Wisdom Tree Emerging Markets Equity Income ETF (DEM-NYSE)
  • MER: 0.63 per cent
  • 12-month yield: 3.14 per cent

This ETF, which invests in high-dividend-yielding equities, offers more defensive exposure to emerging markets, he said. With stocks weighted according to annual cash dividends paid as opposed to dividend yield, there is a tilt to large-value companies. Emerging-markets companies that must use a large portion of their free cash flow for dividends are forced to use their remaining monies more carefully, he noted. Financials make up 25 per cent of the ETF, with energy at nearly 22 per cent. Russia and China are the largest country weightings.

John Gabriel, ETF strategist with Morningstar Inc.

  • Schwab U.S. Dividend Equity ETF (SCHD-NYSE)
  • MER: 0.07 per cent
  • 12-month yield: 2.59 per cent

This ETF, which invests in high-quality stocks, is the cheapest U.S.-listed dividend fund, Mr. Gabriel said. "Quality companies are typically characterized by stable earnings, high profitability, low debt and healthy dividends." They also tend to be less volatile, and can "help buoy a portfolio during a market crisis," he added. The weaknesses of some dividend ETFs were exposed in the 2008 credit crisis because of their heavy weighting in financials. This ETF, which has less than 5 per cent in financials, includes Microsoft, Johnson & Johnson and Procter & Gamble.

  • Vanguard High Dividend Yield ETF (VYM-NYSE)
  • MER: 0.10 per cent
  • 12-month yield: 2.77 per cent

This U.S. dividend ETF invests in stocks with the highest dividend yields, but excludes real estate investment trusts (REITs). "I like the simple and straightforward methodology," Mr. Gabriel said. "The strategy ranks the universe by the 12-month forward dividend per-share forecast using analysts' estimates, and weights its holdings by market capitalization." The ETF holds about 390 stocks with about 16 per cent in technology and 13 per cent in consumer companies. Holdings include Apple, Wells Fargo and Johnson & Johnson.

  • Vanguard FTSE Canadian High Dividend Yield ETF (VDY-TSX)
  • MER: 0.34 per cent
  • 12-month yield: 2.84 per cent

This Canadian equity fund follows the same strategy as the Vanguard High Dividend Yield ETF. "The market cap [or market value] weighting helps add an element of quality, and prevents tinier or riskier firms from taking up too much of the portfolio," he said. "This can be an important distinction as such firms are likely to get hit harder in the event of a market correction." The fund, which tracks 77 stocks, has a 55-per-cent weighting in financials and 25 per cent in energy. It owns the big five Canadian banks and names such as Enbridge and TransCanada.

Pat Chiefalo, director of ETF research and strategy at National Bank Financial

  • iShares S&P/TSX Equity Income ETF (XEI-TSX)
  • MER: Projected at 0.22 per cent
  • 12-month yield: 4.09 per cent

This ETF, which is now the cheapest Canadian-listed dividend fund, will appeal to bargain-hunting income seekers, he said. "With an indicated yield of nearly 4.1 per cent, this fund also had a history of good dividend growth." The ETF offers more diversification than some traditional peers because the cap on sectors keeps both the energy and financial stocks at a 30-per-cent weighting. The top 10 holdings include three of the largest domestic banks as well as Rogers Communications, Potash Corp. and Sun Life Financial.

  • iShares Canadian Select Dividend ETF (XDV-TSX)
  • MER: 0.55 per cent
  • 12-month yield: 3.81 per cent

This ETF, which tracks 30 Canadian stocks and offers monthly payouts, is the largest domestic dividend ETF with about $1.4-billion in assets, he said. It invests in companies screened for dividend yield, dividend growth and payout ratios. The result is that financials represent 53 per cent of the ETF followed by energy at 15 per cent and telecommunications at 13 per cent. The top 10 holdings include seven banks as well as Bonterra Energy, BCE and AG Growth International.

  • PowerShares Canadian Dividend ETF (PDC-TSX)
  • MER: 0.55 per cent
  • 12-month yield: 3.30 per cent

This ETF tracks 45 Canadian stocks with a history of increasing dividends over the past five years, and ranks them by market value. The group has had "an impressive record of growing dividends," he said. "We feel that this is important because, if interest rates ever begin to rise, this [dividend growth] will be an important buffer." The ETF, which has a monthly distribution, is nearly 60 per cent invested in financials followed by 14 per cent in energy. The top 10 holdings include five banks, as well as BCE, TransCanada and Thomson Reuters.