Even after a huge run-up, you can still nail a dividend yield of about 2.5 per cent by investing in a broad-based Canadian equity ETF.
But you can do better, yield-wise, by looking at exchange-traded funds that hold exclusively Canadian dividend-paying stocks. These products differ widely in their approach to portfolio building, which means yields vary by a surprising amount. Globeinvestor.com data shows that among the Canadian dividend ETFs covered in the 2021 Globe and Mail ETF Buyer’s Guide, yields range from a high of 4.1 per cent for Invesco Canadian Dividend Index ETF (PDC-T) to a low of 2.9 per cent for the CI Wisdomtree Canadian Quality Dividend Growth Index ETF (DGRC).
For context, five-year Government of Canada bond yields are stuck below 1 per cent, and five-year term deposits are in the low 2-per-cent range at best. Payouts from a dividend ETF look even better on an after-tax basis in non-registered accounts because of the dividend tax credit.
PDC’s yield is helped by the fact that its top holding is Enbridge Inc., currently yielding around 6.7 per cent. PDC tracks the Nasdaq Select Canadian Dividend Index, which is based on a screen seeking stocks with higher yields than the broader market and a track record of dividend growth.
Some other high-yielding dividend ETFs:
- BMO Canadian Dividend ETF (ZDV), with a yield of 4.1 per cent. Yield and dividend growth are part of the screening process used in building the portfolio, which also includes Enbridge as a top holding.
- iShares S&P/TSX Composite High Dividend Index ETF (XEI), with a yield of 3.9 per cent. Surprise – Enbridge is the top holding, followed by BCE Inc., which has a yield of about 5.7 per cent.
- Vanguard FTSE Canadian High Dividend Yield Index ETF (VDY), with a yield of 3.8 per cent. Enbridge and BCE are in the mix here, but bank stocks get a higher weighting.
When researching individual dividend stocks, it’s not uncommon to find that higher-yielding names are performance laggards. But each of the higher-yielding dividend ETFs listed above have equalled or beaten the S&P/TSX composite return over the 12 months to June 30.
Low fees are an important factor in maximizing yield from dividend ETFs, a category that can be comparatively expensive. For example, PDC’s management expense ratio is 0.56 per cent. VDY is the low-cost fund in this group, with an MER of 0.21 per cent. XEI’s MER is 0.22 cent, while ZDV comes in at 0.39 per cent.
One final tax note: Dividend ETFs typically have a small return of capital component to their payouts. A return of capital isn’t taxable when you receive it, but it does reduce your cost base for an investment and thus increases your capital gain when you sell.
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