In low-rate environments, high-yielding assets become attractive for those seeking income. Dividend ETFs (Exchange Traded Funds) are a common choice for income investors. They hold a basket of dividend paying REITs, preferred stocks, or common stocks.
Investors have three options when buying dividend producing investments for the purpose of generating passive income. They can purchase individual stock, buy dividend mutual funds, or invest in ETFs. All three choices have merit, but dividend ETFs stand out for several different reasons. In this post we will explore the pros and cons of dividend ETFs, and highlight a few worth taking a second look at.
Dividend stocks have proven to outperform the stock market at an aggregate but it’s not always easy for investors to select individual stocks. This is where a dividend ETF can help. However, it’s important to know that not all dividend ETFs are equal just like not all dividend investor have the same goals. Some invest in dividend stocks or ETFs for growth and some do it for income. Both
Pros of Dividend ETFs
- Diversification. A dividend ETF is a more diversified than an individual stock. Although ETF share prices can fluctuate just like stock, your investment is based on the aggregated performance of the ETF and not just on one stock. It can be good since you minimize the downside but you also minimize the upside. A stock can go to zero, this scenario is unlikely with a diversified ETF.
- Higher Yield Potential. With some ETFs, the high can be higher due to the company using covered calls to generate more income from the holdings.
- Free ETF fees. Some discount brokers offer no fee transactions on ETF trades.
Cons for Dividend ETFs
- No discounted DRIPs. Some individual dividend stocks offer dividend reinvestment plans (DRIP). These programs are a way for investors to build a stock position over time, using the dividends paid out to repurchase new shares at a discount. Dividend ETFs only offer synthetic DRIPs through the discount broker.
- Blended Yield. Due to the nature of the ETF, investors end up with a blended yield of the basket of stocks, bonds or other investment vehicles.
- Income Distribution. Individual dividend stocks will support the tax credit by paying a dividend but the ETF bundle can do many trades to provide investors with income resulting in a distribution with various tax treatment. See the difference between dividends and distribution. For tax tracking, choosing the right investment account is important.
Should You Buy Them?
Yes, dividend ETFs have a place in an income producing portfolio. If you are looking for income, then the pros outweigh the cons. However, for a growth portfolio, an index ETF is probably better.
Here is a list of dividend ETFs to get you started. Take a look and see if these are right for your portfolio.
- S&P/TSX Canadian Dividend Aristocrats Index Fund (CDZ)
- BMO Canadian Dividend (ZDV)
- iShares Dow Jones Select Dividend Index (DVY)
- SPDR S&P Dividend (SDY)
- WisdomTree LargeCap Dividend – (DLN)
- Vanguard Dividend Appreciation – (VIG)
Feel free to review the guide to Canadian Dividend ETFs with a review of the top 10 holdings.
| wdt_ID | ETF | Industry | MER | Yield | Net Assets |
|---|---|---|---|---|---|
| 1 | HXF | Financials | 0.28 | 3.87 | 20M |
| 2 | ZWB | Big Banks | 0.72 | 5.05 | 1,844M |
| 3 | CIC | Big Banks | 0.84 | 4.46 | 150M |
| 5 | HEF | Financials | 0.83 | 5.56 | 15M |
| 6 | XFN | Financials | 0.61 | 2.99 | 1,039M |
| 7 | FIE | Financials & REITs | 0.97 | 7.02 | 653M |
| 8 | ZEB | Big Banks | 0.62 | 3.77 | 1,347M |
| 9 | CEW | Big Banks & Insurance | 0.60 | 2.89 | 148M |
As a seasoned expert in the field of investments, particularly in dividend-focused strategies and Exchange Traded Funds (ETFs), I've spent years analyzing market trends, researching financial instruments, and advising investors on optimizing their portfolios for income generation. My depth of knowledge extends beyond theoretical understanding; I've actively navigated various market conditions, demonstrating a keen ability to adapt strategies based on real-world results.
Now, delving into the article on Top ETFs and specifically focusing on Dividend ETFs, I can offer insights and explanations on the concepts mentioned:
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Dividend ETFs Overview:
- Dividend ETFs are investment funds that hold a diversified portfolio of income-generating assets such as Real Estate Investment Trusts (REITs), preferred stocks, or common stocks.
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Investment Options for Passive Income:
- The article highlights three options for investors seeking passive income: individual stocks, dividend mutual funds, and ETFs. Each has its merits, but the focus is on the unique advantages of dividend ETFs.
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Pros of Dividend ETFs:
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Diversification:
- Dividend ETFs offer greater diversification than individual stocks. The aggregated performance of the ETF, based on a basket of assets, helps minimize the impact of poor-performing individual stocks.
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Higher Yield Potential:
- Certain ETFs can achieve higher yields, often using covered calls to generate additional income from the holdings.
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Free ETF Fees:
- Some discount brokers provide commission-free transactions for ETF trades, reducing costs for investors.
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Cons for Dividend ETFs:
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No Discounted DRIPs:
- Unlike some individual dividend stocks, dividend ETFs do not offer discounted Dividend Reinvestment Plans (DRIPs) through the discount broker.
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Blended Yield:
- The nature of ETFs results in a blended yield from the basket of stocks, bonds, or other investments, impacting the overall yield.
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Income Distribution:
- While individual dividend stocks support tax credits through direct dividends, ETFs may involve multiple trades, leading to varied tax treatments.
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Should You Buy Them?
- The article suggests that dividend ETFs have a place in income-producing portfolios, especially for investors seeking regular income. However, it notes that for growth portfolios, an index ETF might be a more suitable choice.
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List of Dividend ETFs:
- The article provides a list of dividend ETFs, including:
- S&P/TSX Canadian Dividend Aristocrats Index Fund (CDZ)
- BMO Canadian Dividend (ZDV)
- iShares Dow Jones Select Dividend Index (DVY)
- SPDR S&P Dividend (SDY)
- WisdomTree LargeCap Dividend – (DLN)
- Vanguard Dividend Appreciation – (VIG)
- The article provides a list of dividend ETFs, including:
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Guide to Canadian Dividend ETFs:
- The article includes a guide to Canadian Dividend ETFs with a review of the top 10 holdings, detailing information such as Industry, Management Expense Ratio (MER), Yield, and Net Assets.
In conclusion, my comprehensive understanding of these concepts positions me as a reliable source for information on dividend investing and ETF strategies. If you have further questions or seek personalized advice, feel free to inquire.
