Unlocking the Power of High Dividend ETFs: The Ultimate Guide to Boosting Your Investment Portfolio

Why Invest in High Dividend Strategies in the Canadian Market? As one BoA analyst put it, "Embrace dividends, embrace inflation, embrace Canada."

Investing in high dividend strategies, which involves buying stocks or ETFs with high dividend yields, provides relatively stable cash returns through regular shareholder payouts, making it especially valuable during uncertain economic cycles.

When looking at the global economy, the drop in interest rates and the overall economic recovery have a strong positive impact on high dividend stock prices. However, this effect is even more pronounced in the Canadian market. Compared to the US stock market, the Canadian market has a higher overall dividend yield due to factors such as industry structure, and local companies generally receive tax incentives from the government. Overall, the Canadian market is very suitable for high dividend investing.

Exchange-traded funds (ETFs), as a type of investment tool that combines multiple assets, provides transparent management and easy trading, and when combined with a high dividend strategy, further opens the door for investors to diversify and obtain stable income at low cost.

In the following article, we will delve into why it is advantageous to choose high dividend investing in Canada, and further analyze the unique advantages of using ETFs as a vehicle to implement this strategy.

In general, dividends are a part of a company's profits and are usually distributed to shareholders in cash. The level of dividends is strongly correlated with the stability and profitability of the company's operations. Companies that maintain stable operations over a longer period of time are often able to pay higher dividends to investors, but because these companies are relatively mature and have limited growth potential, their stock prices are often undervalued.

In the composition of the benchmark index, the S&P/TSX Composite Index, the financial and energy sectors have the highest proportion, followed by materials and industry. Compared to tech and consumer companies that rank high in the US stock market, these companies often have relatively stable operations and higher dividend payouts. In terms of the financial sector, Canada's financial sector is also "safer" than the US stock market. For example, in the past few financial crises, the US stock market suffered a huge blow, but Canadian banks and other financial institutions performed much better and rarely experienced bankruptcy and liquidation situations. This indicates that from an industry structure perspective, Canada's top companies are generally more stable, meaning higher dividend payouts, and more suitable for high dividend investing.

At the same time, according to Canada's tax system, Canadian dividends are divided into eligible dividends and non-eligible dividends. Eligible dividends usually come from Canadian companies that have already paid a higher rate of corporate income tax on their profits, and shareholders who receive such dividends can enjoy higher personal tax deduction limits because this portion of dividends has already been taxed at the corporate level. Therefore, investors who invest in high dividend Canadian companies can also receive certain tax benefits.

However, it should be noted that simply pursuing high dividends is not always the optimal investment strategy. When selecting high dividend stocks, investors should also consider factors such as the sustainability of dividend payments, the company's growth prospects, industry cycles, and the stability of dividend policies.

As a type of investment product that includes multiple securities, ETFs are a diversified investment portfolio that allows investors to obtain broad market coverage, including high dividend stocks from multiple industries and regions, through a single trade. This highly diversified investment approach helps to reduce the risk associated with individual stocks, allowing investors to safely enjoy the potential benefits of high dividend strategies.

At the same time, compared to directly purchasing multiple high dividend stocks, ETF investors only need to pay a one-time trading commission, which means lower transaction costs and management fees. Compared to traditional actively managed mutual funds, ETFs mostly operate by passively tracking a certain index. The following chart shows the average cost comparison between ETFs and mutual funds. Compared to the latter, the average management fee of ETFs is significantly lower.

In addition, ETFs are listed and traded on exchanges, making buying and selling convenient and having high liquidity, allowing investors to quickly adjust their investment portfolios based on market changes and achieve flexible entry and exit.

In recent years, ETF trading in Canada has developed quite rapidly. According to estimates from the Canadian ETF Association, from 2013 to 2023, the market share of Canadian ETFs will increase from 6% to 16%, an increase of 267%.

Of course not! As ETF products that mainly focus on stable dividend payments, high dividend ETFs will continue to pay dividends, but their prices generally hover within a certain range, with limited potential for stock price growth. Some stocks with better growth potential can offer much higher returns than high dividend stocks.

Therefore, when selecting such products, we not only need to pay attention to the level of dividend yield, but also need to understand other product characteristics:

1. Investment targets. We must pay attention to what targets we are investing in, for ETFs, what stocks they are tracking? What are the risks behind them? How is the operation of these companies, can they continue to profit, and do they act with integrity? Can the investment portfolio distribute risks?

2. Return performance. We also need to pay attention to the stability of the ETF's returns and dividends, which are generally measured by the product's one-year return rate and dividend rate. For high dividend ETFs, the dividend rate may be an important factor that attracts investors because it represents a stable cash flow income. However, the overall return of investors depends not only on the dividend rate, but also on market conditions, investment decisions by fund managers, and various macroeconomic factors that can affect the price changes of ETF shares, thereby affecting the total annual return rate.

3. ETF size and management fees. Generally speaking, we prefer to choose larger and more liquid ETFs for investment, because they usually have active trading with lower transaction costs, and the fund management team is more mature and better able to respond to market changes. Lower management fees can also increase our net investment income.

As shown in the table above, the earliest three ETFs to be established are CDZ, PDC, and HAL; the three ETFs with the largest assets under management are XDIV, ZDV, and CDZ; the three ETFs with the highest dividend yield are XEI, PDC, and XDIV; the three ETFs with the highest total annualized return are DGRC, DXC, and VDY; the three ETFs with the lowest management fees are XDIV, VDY, and DGRC.

Below, we will introduce the basic information of each ETF separately.

This ETF was established in 2017 and tracks the global stock market. Its investment portfolio includes more than 300 stocks, mainly covering companies in the United States, Canada, Japan, Europe and other regions, with a focus on the energy, consumer services, industrial and material sectors.

Its fee rate is 0.21%, and as of now, its assets under management are approximately CAD 790 million. The one-year dividend yield is 2.24%, the one-year return rate is 13.5%, and the growth rate in the past three months is about 8.1%.

Canadian High Dividend Index ETF (CDZ) contains approximately 30 high dividend stocks in the Canadian market. This ETF is a low-cost investment portfolio of Canadian high dividend stocks, with a dividend yield higher than average, and stable or increasing dividends. It mainly selects stocks with strong overall financial condition, including stable balance sheets and stocks with less revenue fluctuations. The following are the top ten stocks in the ETF's holdings list:

As of now, the ETF asset size is about 1.13 billion Canadian dollars, the management fee is 0.11%, the one-year dividend yield is 4.78%, the one-year yield is 7.8%, and the increase in the past three months is about 3.4%.

This ETF was established in 2011 and tracks the SP & TXS index, including about 75 high-dividend stocks in the Canadian market. The following are the 10 major holdings of the ETF as of now, mainly concentrated in the energy materials and financial sectors.

The ETF fee rate is about 0.22%, the asset size is about 1.60 billion Canadian dollars, the one-year dividend yield is 5.17%, the one-year yield is 7.78%, and the increase in the past three months is about 2.96%.

The ETF was established by BMO Management in 2011 and includes approximately 50 high dividend stocks in the Canadian market. Compared to XDIV and XEI, ZDV's stock portfolio is more selective, focusing on leading high dividend stocks in the Canadian market, such as leading companies in industries such as banking and insurance.

The management fee of the ETF is about 0.39%, the total asset size is about 1.10 billion Canadian dollars, the one-year dividend yield is 4.13%, the one-year yield is 9.55%, and the increase in the past three months is about 1.22%.

The ETF tracks the S & P/TSX 60 High Dividend Index in the Canadian market, which consists of 60 of Canada's largest companies by market value. Its investment portfolio includes industries such as finance, energy, basic materials, telecommunications, and industry. It mainly screens large and mature Canadian companies that have increased their ordinary cash dividends for at least five consecutive years each year.

The management fee of the ETF is about 0.66%, the total asset size is about 900 million Canadian dollars, the one-year dividend yield is 3.93%, the one-year yield is 9.29%, and the increase in the past three months is about 3.23%.

The ETF was established in 2017 and mainly tracks the Canadian small and medium-sized company stock market, as well as holding a small portion of US stocks. Its investment portfolio includes more than 40 stocks, mainly covering industries such as finance, energy, and communications.

The management fee of the ETF is about 0.6%, the total asset size is about 200 million Canadian dollars, the one-year dividend yield is 2.8%, the one-year yield is 12.9%, and the increase in the past three months is about 3.59%.

The ETF was established in 2010 and seeks long-term total returns, including regular dividend income and long-term capital growth. It primarily invests in stocks of Canadian companies with above-average dividend yields, while holding a very small portion of Bermuda-area stocks.

The ETF management fee is about 0.68%, the asset size is about 19 million Canadian dollars, the one-year dividend yield is 4.20%, the one-year yield is 6.29%, and the increase in the past three months is about 5.94%.

The ETF mainly tracks high-dividend financial companies in Canada, including major banks and insurance institutions.

Its management fee is about 0.57%, the total asset size is about 780 million Canadian dollars, the one-year payout ratio is 4.91%, the one-year yield is 9.00%, and the increase in the past three months is about -0.22%.

This ETF tracks 59 stocks with long-term development potential and high dividends, mainly concentrated in the financial, energy, and industrial sectors.

Its management fee is about 0.39%, the asset size is about 147 million Canadian dollars, the one-year payout ratio is 4.42%, the one-year yield is 9.30%, and the increase in the past three months is about 4.19%.

The ETF tracks the performance of a broad Canadian stock index that measures the investment returns of Common Stock, a Canadian company characterized by high dividend yields.

Its management fee is about 0.2%, the asset size is about 250 million Canadian dollars, the one-year payout ratio is 4.57%, the one-year yield is 12.64%, and the increase in the past three months is about 5%.

Overall, the performance of the above ten ETFs has been good in the past three months. As mentioned at the beginning of the article, investing in these products has many advantages, including risk diversification, continuous cash flow, low cost and flexibility to enter and exit. However, there are also some risks that need to be paid attention to:

Dividends are not guaranteed: Although high dividend ETFs usually contain stocks of companies with good historical dividend payment records, dividends are not fixed and may be reduced or even suspended due to poor performance or other reasons.

Ignoring growth: Focusing too much on dividend yields may cause investors to overlook the growth potential of enterprises. Some high dividend stocks may tend to distribute high dividends due to mature business and limited growth space. In the long run, the potential for stock price appreciation of these companies may not be as good as that of growth-type companies.

Market volatility risk: Although high dividend products can buffer the impact of market volatility to a certain extent, the net asset value of ETFs may still be affected and result in investment losses during economic recession or large stock market adjustments.

Income is affected by exchange rate: For investors who invest in overseas high dividend ETFs, in addition to the volatility of the underlying market, they also need to pay attention to exchange rate risk. Exchange rate fluctuations may affect actual investment returns.

Therefore, before investing in high dividend ETFs, investors need to comprehensively consider their risk tolerance, investment objectives and market environment, and adjust their investment portfolios in a timely manner to achieve the best risk-return balance.