Using Canadian Dividend ETFs as your core Canadian holding.

As warm and cuddly and comforting as are dividends, the subject or investment approach can lead to some lively debates. Many will write (or build podcasts on the subject) that dividends simply don’t matter.

On that, here’s a measured response from Mike at The Dividend Guy blog. Please have a read of Should I Go With Dividend Growth Investing or ETFs. An Answer To Ben Felix. Of course many dividend and dividend growth investors will simply reference or pull out the Ned Davis research on S&P 500 constituents.

Ned Davis Study Dividends

I like the evidence from the Dividend Aristocrats (NOBL) in the US and Canada (CDZ) that both have greater total returns compared to broad market funds through the last market cycle. There is a longer history of outperformance to observe in the US market with those Aristocrats that insist on at least 25 years of annual dividend increases. The threshold for a Canadian Aristocrat is 5 years of dividend increases.

All said, I will leave it to you to decide if dividends matter – to you. Given that nothing is more important than investor behaviour, if watching the dividends is a very useful distraction and those dividend payments allow you to stick to your plan, then they are more than worth the dollar value that shows up in your discount brokerage account.

And for the record I do think or know that the benefits of dividend growth investing does move beyond the emotional and behavioural and into the math and the types of companies that can be found by way of a meaningful dividend growth history. Even Ben Felix will admit that it can help us find certain types of companies and investment factors.

Canadian Investors Need Help! 

Let’s face it, the Canadian market is not well diversified. I would often state to clients that Canada makes for a terrible investment. The Canadian market is concentrated in financials and energy and commodity related sectors.

From iShares XIC, TSX capped composite.

TSX Composite Sector Breakdown

The Canadian investor needs the sector and geographic diversification offered by the US and perhaps International markets. Here’s the sector breakdown of the S&P 500, by way of iShares IVV.

S&P 500 Sector Breakdown

The basic principle of the need for added diversification holds true whether a Canadian investor embraces core index funds or dividend focused funds. How much you add by way of International exposure is certainly a personal decision. I am of the opinion that you might go light on that front given that the large and mega cap US companies earn a considerable percentage of their profits overseas. That said in a recent CTCI investing post I suggested you might also look to developing markets where there is greater growth and growth potential.

Canadian Dividend ETFs

For my Canadian allocation in my personal RRSP account I hold a concentrated portfolio of individual bank stocks, plus pipelines and telco’s. I do not expose my wife’s personal RRSP account to that concentration risk, we hold Vanguard’s High Dividend Yield ETF, ticker VDY. That is the core holding. Here is the sector breakdown for the VDY fund.

Vanguard VDY Sector Breakdown

We are obviously increasing the concentration in the financial sector that will include the big Canadian banks and insurance companies, with the energy sector covered more by pipelines and utilities compared to energy producers that can be more cyclical and volatile. Here’s the top 10. It is certainly a concentrated fund.

Vanguard VDY Top Ten

An investor who embraces the broad core index models will see this as concentration risk and lack of diversification. A dividend investor might argue the fund holds more of what works in Canada. The well-known Canadian dividend newsletter The Connolly Report (recently retired) had a long history of beating the markets by way of concentrating in dividend payers within those more wide moat oligopoly sectors. His market beat was to the tune of more than 4% annual. That is obviously significant.

While the VDY inception date goes back to late 2012 and the period does not include a full market cycle the beat of VDY over XIC is just under 1% annual.

And of course dividend investors may be looking for (or looking at) that yield. The trailing yield for VDY is 3.92% compared to 2.83% for the TSX Composite. Retirees might like that yield boost for spending power. Other investors simply want control of more of those company profits. They can reinvest the dividends or move the dividends received to other assets as they please. Of course investors should always consider the tax consequences when the funds are within taxable accounts. While the dividends are qualified Canadian dividends and are eligible for the Canadian Dividend Tax Credit the juicier dividend is not always the most tax advantageous approach.

More Canadian Dividend ETF Options. 

Here’s a great list and overview from Rob Carrick at the Globe and Mail. That article covers 11 of the most widely held ETFs. Not on that list is the iShares Core MSCI Canadian Quality Dividend Index ETF. Rob states that funds need to have a 5 year history before making his ETF overviews, but he’s keeping an eye on that fund.

Of course I have penned on that fund as that is the smart beta index approach used by the Tangerine Dividend Portfolio. One can use the Tangerine fund if they want a managed portfolio that offers exposure to Canadian (50%), US (25%) and International (25%) dividend payers. On Seeking Alpha I wrote Those Big Juicy Dividends Beat The Market In Canada, US and International.

For an overview and other dividend ETF lists you might have a read of Top Canadian Dividend ETFs for 2018 from Mark Seed at myownadvisor.

Canada For What Works. US For That Diversification.

The lack of sector diversification in Canada is not solved by holding a broad market index ETF. So one might embrace the dividend approach and hold more of ‘what works’ in Canada and take advantage of the unique oligopoly situations in Canada. That said, it’s just a personal choice, holding a traditional plan vanilla couch potato portfolio certainly does the trick. You’ll find those options at the top of the ETF Model Portfolio page.

Thanks for reading. I could say it’s good to be back in Toronto, but I certainly miss my daughter and the East Coast. We were recently in Halifax and PEI for our daughter’s graduation ceremonies. She earned a BSc in Chemistry with a minor in Biology, with distinction of course. We are so proud. She is now in Halifax preparing for grad studies.

Here’s a pic from our day trip to Peggy’s Cove. Take that Toronto.

Peggy's Cove 4

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Contact me, Dale @ or better yet, leave a message on this post.

10 thoughts

  1. Since inception in 2011 BMO Low Volatility Canadian Equity ETF (ZLB) has displayed greater growth, dividend growth and diversity across the sectors than the Canadian equity index and all Canadian Dividend ETFs. IMO ZLB should be a core hold in a Canadian investors portfolio.

    The holdings and sector breakdown for ZLB can be viewed here:!hash!holdings#fundUrl=%2FfundProfile%2FZLB%23holdings

    Liked by 1 person

    1. Thanks Bernie, I remember reading an article where the basic theme was that “we have to take on more risk to get greater returns” is one of the biggest misconceptions in the world of investing.


  2. Another good article Dale 🙂

    I’m happy that I made the switch from indexed ETF’s to dividend ETF’s now that I decided to retire completely at 59.

    I recently sold my BMO ZDB bond ETF and bought more BMO ZPR preferred shares ETF. I’ve now got my dividend income up to $43K/year.

    A lot of people are not keen on prefs but they work for me to boost monthly income in a tax efficient manner.


    1. Thanks, mkosk, I would be more of a fan of pure dividend growth and with a slant to some share harvesting / total returns approach. I have read of the tax efficiency of pref’s in some Justwealth posts or writings. That said we lost that classic inverse relationship of stocks to bonds. Bonds are traditionally used to manage that sequence of returns risk for retirees. I know that income can also help reduce sequence or returns risk but I’d rather cover that off with some bonds. Retirees might look for that balance of enough income coverage and risks managed by bonds and cash. And all said I understand the comfort that comes from generous income, that’s why I will write on the subject 🙂 Nothing is more important than investor behaviour and the things that can keep us on track. Thanks again for stopping by, and for the comments.

      Liked by 1 person

  3. “For my Canadian allocation in my personal RRSP account I hold a concentrated portfolio of individual bank stocks, plus pipelines and telco’s. I do not expose my wife’s personal RRSP account to that concentration risk, we hold Vanguard’s High Dividend Yield ETF, ticker VDY. That is the core holding. Here is the sector breakdown for the VDY fund.”

    hmm I’m confused – isn’t VDY also highly concentrated in banks, pipeline and telcos making up ~75% of the holdings? The only difference is the oil & gas sector.


    1. Hi fbgcai, there is certainly sector concentration in VDY. I was referencing individual stock concentration risk of my personal portfolio. I might have a different take on ‘risk’. Ha. And yes that VDY is concentrated greatly in the top 10 holdings. But I’d see those holdings as having more of those wider moats. And I’ll be back to write on how many stocks does it take to replicate an index. It is surprising on how few it takes. Of course, we should be careful with those concentration risks. I am comfortable. I may write differently in a decade or less, ha.


  4. Congratulations on your daughter’s graduation and a vacation in Nova Scotia for a double win!

    What do you think of the iShares DGRO? It’s certainly a better option than iShares IVV for a budget minded person such as myself! I’ve pretty much decided to buy DGRO to have USD in my RSP. Perhaps buying about $2000/year of it, let the dividends DRIP.

    I hold a large amount of VCN in my non-registered account. Doesn’t appear to be a huge amount of difference with VDY, unless I’m missing something that’s glaringly obvious to everyone else?

    I look at dividend income to help me with monthly expenses, but I’m also open to ETFs that pay lower dividends but have higher growth potential. Right now I’m preparing to sell a $25,000 mutual fund and buy more ETFs, it’s just figuring out where I’m sending it before I pull the plug on that mutual fund, which would be going to non-registered. TFSA is fully funded. I have Horizons HYI and iShares XEI. Just trying to figure out if I should be buying more shares of them and VCN, or if I should look at growth over dividends at this stage. I hold VGRO in my RSP and I’m open to having it in my non-registered.

    I have a lot of USD and International in my TFSA ETFs, not so much looking for them in the non-registered, but not ruling them out either. It looks like more research but I hate doing the old paralysis analysis thing.

    Liked by 1 person

    1. Thanks Cheryl, it was an awesome time. I am now in Wasaga Beach as my son has friends at the in-laws cottage for a high school celebration weekend. Ha. Chaperone of 7 fine young men. Fun times. I am familiar with DGRO but will look more closely before I respond. Thanks again and have a great day.



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