5 Best Dividend ETFs in Canada (2022)

| November 4, 2022
✓ Verified by Harhsil Dhanky

Dividend stocks are some of the best investments for those seeking passive income.

However, individual stocks are exposed to unique risks.

A downturn in a specific industry could lead some companies to cut dividends or suspend them altogether. 

To mitigate these risks, a savvy investor should have a broad portfolio of dividend stocks.

Exchange-traded funds (ETFs) make this strategy easier to implement.

Here are the top five dividend ETFs you should consider. 

Ticker Company Dividend Yield Investment Strategy Fees (MER)
XEI Blackrock 3.6% Invests in low-risk, high-yield, blue chip dividend stocks.  0.22%
CDZ Blackrock 3.4% Invests in companies that have raised dividends every year for at least five consecutive years. 0.66%
HAL Horizons 2.97% Invests in high-yield dividend stocks across North America. 0.67%
VIG Vanguard 1.9% Invests in US companies that consistently grow dividends. 0.06%
VYM Vanguard 2.77% Invests in US high-yield dividend stocks. 0.06%

As of May 2022

1. iShares S&P/TSX Composite High Dividend Index ETF (XEI)

The XEI fund seeks to replicate the performance of the S&P/TSX Composite High Dividend Index while keeping costs low.

Since its inception, the ETF has delivered a compounded annual growth rate (CAGR) of 7.86%.

Over the past year, its performance has gone into overdrive.

The fund has delivered 26.1% in total return over the past twelve months at the time of writing in May.

That’s because the fund is heavily weighted towards Canadian oil and gas stocks.

The five biggest holdings in the fund are all energy giants like Suncor, Enbridge, Pembina and Canadian Natural Resources.

Altogether, 32% of the fund is based in the energy sector, while banks and financial companies make up another 28%. 

With rising interest rates and a supply shock in crude oil, these two sectors could see further cash flow growth in the months ahead.

That means XEI’s total return and 3.6% dividend yield could rise higher by the end of 2022.

That’s why this ETF deserves a spot on your list. 

2. iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (CDZ)

Banks and energy companies have surged ahead in dividend yields over the past two years.

However, other sectors of the economy have delivered more steady dividend growth over longer time horizons.

That’s the strategy adopted by the iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (TSX:CDZ).

CDZ focuses on companies that have expanded their dividend payout every year for at least five consecutive years.

That means the portfolio is focused on companies that can deliver shareholder rewards during market distress and changes in the economic cycle. 

So-called dividend aristocrats have a demonstrable track record of rewarding patient shareholders.

The ability to boost dividends every year signifies a healthy business model, inflation-resistance, pricing power and a shareholder-friendly corporate culture. Dividend growth is also a driving factor behind long-term stock market performance. 

CDZ’s top three holdings are energy companies like Keyera and Enbridge.

However, niche dividend stocks like Fiera Capital and Slate Grocery REIT are also top holdings.

Overall, CDZ’s portfolio is better diversified, with financial companies contributing 23.2% of assets and energy only 15%. 

The fund has delivered a CAGR of 7.2% since inception.

This return could be more stable than the high-yield fund mentioned above. 

3. Horizons Active Canadian Dividend ETF (HAL)

Two things set the HAL fund apart from others.

The portfolio is spread across North America and it’s rebalanced frequently.

In other words, the fund’s managers seek to find the best dividend stocks across the continent and shift the portfolio in-line with the market cycle.

This active approach should, in theory, lead to better performance. 

HAL has delivered a CAGR of 9.6% since inception in 2010, which is better than most other dividend ETFs on this list. 

At the time of writing, HAL’s portfolio was dominated by Canadian energy and banks.

34.5% of the portfolio was in oil and gas, while 93.3% was based in Canada.

The rest was spread across the United States and invested in diverse sectors such as finance and real estate. 

Investors can expect this portfolio to change over time as the fund management team is proactive in seeking out the best dividend stocks.

This strategy is more intensive but can help elevate the ETF’s overall yield and performance. 

However, this actively-managed fund isn’t necessarily expensive.

The management expense ratio is 0.67% at the end of 2021.

That makes HAL a perfect fit for investors trying to maximize performance and dividends over time. 

4. Vanguard Dividend Appreciation ETF (VIG)

Canadian investors may be over-exposed to the domestic stock market.

This home bias has crowded portfolios with energy and banking stocks.

One way to diversify is to invest in dividend stocks across the border.

Vanguard’s Dividend Appreciation fund focuses on large-cap American companies with steadily growing dividends.

The fund’s largest holdings are tech and pharma giants like Microsoft Corp. and Johnson & Johnson.

$10,000 invested in this fund ten years ago would be worth $32,390 today – a CAGR of 12.45%.

That’s far better than most Canadian dividend stocks.

Because the portfolio is heavily tilted to tech and consumer companies, it experiences a better growth rate.

The average earnings growth of the VIG portfolio is 15.6%. 

VIG is an excellent instrument to add US exposure to your portfolio. 

5. Vanguard High Dividend ETF (VYM)

The Vanguard High Dividend ETF (VYM) focuses on American stocks with the highest yield and the best quality.

The portfolio is a good mix of energy, industrials, healthcare and consumer staples.

It includes household names like Coca Cola, Home Depot, Mastercard and Visa. 

$10,000 invested in this fund ten years ago would be worth $30,330 today.

That’s a CAGR of 11.74%. 

The fund’s top holding is Johnson & Johnson, which has been one of the best-performing healthcare stocks over the past year.

The fund’s third largest holding is energy giant Exxon Mobil which is also having an excellent year.

If the price of crude oil remains above $100, Exxon could see further upside to cash flow and dividend payouts throughout 2022. 

Despite the fund’s name, Vanguard High Dividend’s 2.77% yield is not as high as its Canadian counterparts as the underlying companies are more defensive and less cyclical.

However, that makes the passive income from this fund relatively more reliable. 

Guy researching Dividend ETFs on laptop

What is a Dividend ETF?

A dividend ETF is a fund that invests in dividend-paying stocks.

Usually, these funds are designed to offer steady recurring income from a broad portfolio of blue-chip assets.

Key Considerations When Investing in Dividend ETFs in Canada

Investors must consider all aspects of a specific dividend ETF before investing.

Perhaps the most important element of such funds is the yield.

Usually, a high yield signals robust profit margins and good pricing power for the underlying companies.

However, a high yield could also be deceptive if the industry or underlying companies are in decline.

This is why investors must also consider the fund’s strategy and portfolio mix.

Any fund that is overexposed to a certain sector (such as energy) could be more cyclical and risky if the economic trend shifts. 

Another factor to consider is the expense ratio.

If the ratio is too high, it undermines the dividend yield and long-term total return of the fund.

Frequently Asked Questions

  • Are dividend ETFs worth investing in?
  • Which ETFs pay the highest dividends?

Vishesh Raisinghani is the founder of Sharpe Ascension - a financial content marketing agency based in Toronto. Born in Mumbai, India and graduated from the Manchester Metropolitan University, he has been investing in and writing about stocks since 2011.

His investments and research are focused on tech stocks, growth opportunities, cryptocurrencies, emerging markets, and real estate. His clients include hedge funds, family offices, publicly-traded companies and tech startups trying to reach their investors through online communications.

When he's not writing, he's usually cycling around Toronto, paddleboarding on Lake Ontario, reading a book on the beach, slurping beer on a patio or relentlessly tweeting random thoughts. Website | Follow Vishesh on Twitter.