Did you know you can get the best dividend stocks in dividend ETFs? Dividend investing has been one of the most successful strategies for investors in the past 50 years. If you wish to use dividend growth investing to your advantage but don’t want to bother selecting individual stocks, you can choose among several dividend-paying ETFs.

How to select the best Canadian dividend ETF?

Using the Dividend Stocks Rock ETF screener, we can find information on 234 ETFs showing a minimum dividend yield of 1%. You can slash that list by 50% by looking for an ETF with a minimum yield of 3% (122).

Click here to download the complete list of the best dividend ETFs

But going for an ETF based on a yield isn’t enough. There are several criteria you should consider. 

How to Analyse ETFs

As is the case with any investment product, ETFs may track the same asset or follow the same investing strategy, but they are not created equal. There are a few things you must consider before making your decisions. We use the Dividend Stocks Rock (DSR) ETF screener for our analysis but you can go through the best dividend ETFs by going to each investment’s firms ETF section and read their prospectus.

Financial metrics

In the DSR ETF screener, you will find a good list of metrics to analyze ETFs. The year to date, 1yr, 3yr, and 5yr returns will tell you much about the performance of the ETF. It is then easier to know what to expect from this product and make comparisons.

The expense ratio is also very important since you can then pick the cheapest (and hopefully best performing) ETF for a specific sector. If you can’t decide between two similar ETFs, pick the one with the cheapest fees. It is likely the one that will have the best chance of performing well in the future.

Volume and assets under management (AUM) will tell you more about the liquidity and the size of the ETF. It’s important to invest in assets that are liquid and big enough to not be the latest flavor of the month.

The historical spread will also give you an idea on the ETF’s volatility (the wider the spread, the higher volatility). This could have a big impact on price fluctuations during a market crisis. We saw how some preferred shares and bond ETFs plummeted in March of 2020.

The discount/premium to NAV (net asset value) will tell you if you are paying more than what the ETF is worth or if you are getting a bargain. In general, you want this number to be as close to zero as possible in order to buy at the right price.

ETF analysis

While you can easily make your selection based on basic metrics, but if you want exposure to commodities, or bonds, you must perform a few additional checks if you want an ETF that includes equities.

Once you have selected a pack of ETFs that might work with your portfolio, you still have some work to do. The ETF analysis must include the comprehension of the investment strategy. You can usually find this information from the ETF manufacturer (the financial firm managing and selling the ETF). Here’s an example from VIG:

“The investment seeks to track the performance of the S&P U.S. Dividend Growers Index that measures the investment return of common stocks of companies that have a record of increasing dividends over time. The adviser employs an indexing investment approach designed to track the performance of the index, which consists of common stocks of companies that have a record of increasing dividends over time. The adviser attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.”

Some are obviously more complicated or opaque than others. Here’s ZWB.TO, a covered call ETF:

“BMO Covered Call Canadian Banks ETF seeks to provide exposure to the performance of a portfolio of Canadian banks to generate income and to provide long-term capital appreciation while mitigating downside risk through the use of covered call options.”

You know they will use covered call options, but you won’t know much about how their option writing process works with this information. If you are curious, you can also read more in the ETF prospectus also found on the company’s ETF website.

The second step is to check the ETF’s top holdings. This is usually my favorite part as it will quickly determine if this ETF could fit in my portfolio or not. By looking at the top 10 holdings, you will see what drives this investment. If you cringe on one or two company names, you might want to skip this one and select an alternative ETF.

The third step will require you to look at the ETF sector allocation. At DSR, we are currently able to give you the ETF sector if it’s a single sector ETF, but we can’t ventilate several sectors. To do that, you must go to the ETF’s website and look at the graph provided by the financial firm. Looking at how the ETF is invested throughout various sectors will allow you to better predict the impact on your portfolio’s volatility and upside/downside potential. This extra step requires more calculations, but it is crucial for you to include your ETFs allocation in your portfolio.

Finally, I wouldn’t overcomplicate things when it comes down to ETF investing. ETFs have been created to be efficient and simple to understand. Once you have selected the asset exposure you desire, look at a few financial metrics and confirm your choice by looking at what’s inside the hood. If you attempt to track each ETF movement and change in allocation, you may spend as much time as you would have if you selected individual stocks. The power of ETF investing resides in the simplification of your investment strategy. Therefore, if you end up with a dozen ETFs following various patterns, you haven’t necessarily improved your portfolio quality or simplicity.

Best Performing Dividend ETFs (last update May 2022)

While you may be investing in ETFs for the yield, the total performance is also important. Since the beginning of the year, the best performing dividend ETFs are all coming from the same sector… the energy sector!

Horizons Enhanced Income Energy ETF (HEE.TO)

ETF yield: 5.33%

Expense ratio: 0.85%

Total return ytd: 38.00%

CI Energy Giants Covered Call ETF unhedged (NXF.TO)

ETF yield: 7.02%

Expense ratio: 0.72%

Total return ytd: 27.60%

Harvest Energy Leaders Plus Income ETF A Units (HPF.TO)

ETF yield: 4.09%

Expense ratio: 1.50%

Total return ytd: 26.34%

My Favorite Dividend ETFs

Based on the above-mentioned factors, here are some of our favorite dividend-paying ETFs:

Psst, looking for more yield? Here’s an article about covered covered call ETFs

Brompton Global Dividend Growth ETF (BDIV.TO)

ETF yield: 5.33%

Expense ratio: 0.75%

Nb. of holdings: 44

Brompton Global Dividend Growth ETF is offering a generous yield, but you have to pay a steep price (almost 1% in management fees). BDIV.TO shows a strong concentration in information technology (21%), healthcare (14.4%), and the financials sector (14%). Among their largest dividend holdings, we like Canadian Natural Resources (CNQ.TO), AbbVie (ABBV), and Broadcom (AVGO).

Harvest Tech Achievers Growth & Income ETF Class A (HTA.TO)

ETF yield: 6.02%

Expense ratio: 0.99%

Nb. of holdings: 24

We like when ETFs aren’t overcomplicated. Harvest Tech Achievers Growth & Income ETF only includes 24 stocks. By looking at their holdings, you will realized they are all U.S. stocks and they don’t necessarily pay a high dividend (Meta Platforms, Visa, Qualcomm, SalesForce and Microsoft are the top 5 holdings). How do they generate a high yield? by writing covered calls.

BMO Equal Weight Utilities Index ETF (ZUT.TO)

ETF yield: 3.21%

Expense ratio: 0.61%

Nb. of holdings: 18

The BMO Equal Weight Utilities Index ETF shows a straightforward investing strategy in Canadian utilities, which are known to be among the best dividend payers. Among the top holdings, you will find common names such as Brookfield Infrastructure, Canadian Utilities, Hydro One, Fortis and Emera. This is a “sleep well at night” dividend ETF.

BMO EQUAL WEIGHT BANKS INDEX ETF (ZEB.TO)

ETF yield: 3.37%

Expense ratio: 0.60%

Nb. of holdings: 6

Canadian banks are known to be among the best dividend growth stocks on the Canadian market. This dividend ETF tracks the big six with equal weight: The Toronto-Dominion Bank(TD.TO), Bank of Montreal (BMO.TO), Royal Bank of Canada (RY.TO), National Bank of Canada (NA.TO), Bank of Nova Scotia (BNS.TO), Canadian Imperial Bank of Commerce (CM.TO)

Vanguard FTSE Canadian High Dividend Yield Idx ETF (VDY.TO)

ETF yield: 3.40%

Expense ratio: 0.22%

Nb. of holdings: 46

If you are looking for a more broad dividend ETF, the Vanguard FTSE Canadian High Dividend Yield Index ETF should probably be on top of your list. With an average yield above 3% and 100% Canadian content, you will be well served. We find a good concentration in Canadian Banks, Energy, and Telecom stocks. 

iShares Canadian Select Dividend Index ETF (XDV.TO)

ETF yield: 3.88%

Expense ratio: 0.55%

Nb. of holdings: 32

The iShares Canadian Select Dividend Index ETF is similar to DVY.TO but offers a higher yield (it is also more expensive). Again, you will find the classic dividend suspects with banks, energy stocks and telecoms. You will also find a few more interesting dividend stocks such as Canadian Tire (CTC.A.TO) and Labrador Iron Ore Royalty (LIF.TO) among their top 10!

So, which is the best dividend-paying ETF?

There are many answers to this question. The best Canadian dividend ETF is likely the one that will fit with the rest of your portfolio. If you are a beginner investor and you are looking for a diversified dividend ETF, the best choice is probably the Vanguard FTSE Canadian High Dividend Yield Idx ETF (VDY.TO) or the iShares Canadian Select Dividend Index ETF (XDV.TO). However, if you are retired and you focus on income, you might want to look at covered call ETFs.

Many Canadians have used dividend investing to generate a stable source of income. But did you know you could increase this income? By writing covered call options on your holdings, you can boost your investment revenue. Since not all investors are comfortable writing options, financial firms have created covered call ETFs.

Covered call ETFs are dynamically managed funds that provide you exposure to dividend stocks on top of writing covered calls. This strategy generates additional revenue through the sale of each option. Therefore, you don’t need to worry about anything as a professional takes care to boost your investment yield.

While a dividend stock paying a yield above 5% could raise a red flag for many investors (there is no free lunch in finance), it’s relatively easy to find a safe covered call offering a better yield.

Let’s analyze three of the highest-yielding Canadian covered call on the market.

ZWG – BMO Global High Dividend Covered Call ETF

This is a relatively new covered call ETF that focuses on a wide variety of companies worldwide. It currently writes covered calls on around 50 stocks to produce a yield close to 7% and a low beta of 0.74. ZWG looks like a perfect fit for an investor looking for a high income and some stability (beta under 1).

The first thing I look at when I analyze ETFs is the composition of the top ten holdings. I can rapidly identify if I want to invest in the ETF’s favorite companies. For BMO Global High Dividend Covered Call ETF, the top ten represent 38% of all holdings. You can find big names such as Microsoft (MSFT), Home Depot (HD), and McDonald’s (MCD).

ZWG is geared to generate growth and perform during a bull market with a concentration in information technology (24%), financials (17%), and consumer discretionary (14%) sectors. With 70% of U.S. exposure, it’s not as diversified as expected.

We wanted to compare the BMO Global High Dividend Covered Call ETF total return against the Vanguard Dividend Appreciation ETF (VIG) and an S&P 500 ETF (SPY). We want to see if it was worth it to invest in a covered call ETF instead of following a dividend growth investing strategy or simply buying an index. While the covered call ETF is underperforming the other two investment strategies, results aren’t meaningful considering ZWG was created in January 2020.

Let’s move to a covered call ETF that was created in 2017…

ZWC – BMO Canadian High Dividend Covered Call ETF

The Canadian high dividend covered call ETF is similar to the Global High Dividend Covered Call ETF, but it has a more extended history and focuses on Canadian equities. The yield is lower (6%), but you avoid currency fluctuations since all money is invested in Canadian equities. ZWC also pays a monthly dividend and shows similar management fees (around 0.72%).

Out of 35 positions, the top ten represent 47% of ZWC. Unfortunately, this covered call ETF composition looks a lot like the TSX. There is a strong concentration in the financials (38%) and energy (15%) sectors. You will find 4 Canadian banks and a life insurance company among the top ten. This portfolio would be very easy to replicate in your brokerage account if it wasn’t for the covered call option strategy.

We used the iShares Canadian select dividend ETF (XDV.TO) and a TSX index ETF (XIU.TO) to see how the BMO Canadian High Dividend Covered Call ETF fares against other strategies. This time, we had a better time horizon (around 5 years). However, the conclusion is the same: the covered call ETF underperforms both dividend investing and index investing strategies.

Now, let’s move on to Canadian’s favorite covered call ETF: ZWB – BMO Covered Call Canadian Banks ETF!

ZWB – BMO Covered Call Canadian Banks ETF

This covered call ETF is pretty straightforward: it writes call options on the big six Canadian banks. We like that this ETF exist since 2011 as it gives us a long history to study. The management fees are similar to the other two covered call ETF (0.72%) and ZWB provides a yield of 6% with a beta in line with the market (1.00). You’ll notice the etf includes seven holdings…

The most important position of the BMO Covered Call Canadian Banks ETF is… another ETF! The BMO Equal Weight Banks Index (ZEB.TO) represents about a quarter of the total holdings. You then find the bix six:

Since Canadian banks tend to outperform the market due to their unique position in an oligopoly and the ETF is relatively simple (it includes only six companies), we thought of comparing ZWB to the investment return of each of the big six. Surprisingly, the covered call strategy greatly underperforms the average return from the six banks. The covered call ETF generated a total return (capital + dividend) of 163% during the period, while the average performance of the six banks reported 256% on average. Unless you are a big fan of ScotiaBank (149%), you would have done better if you had selected any other banks vs. the ETF!

Final Though

We can appreciate the interest in high-yielding investment products. Covered call ETFs provide a monthly source of income, and their yield is way above what the market offers. 

However, keep in mind that you leave a lot of money on the table if you choose covered call ETFs instead of investing directly in the companies’ stocks.