If you are interested in an ETF that holds dividend-paying stocks, you might be interested in the news that the BMO Canadian Dividend ETF (TSX: ZDV) started trading just recently. The ETF holds 50 stocks that are selected based on dividend growth, dividend yield, payout ratio and liquidity and weighted by yield. The portfolio is then weighted by yield and the portfolio is rebalanced and reconstituted twice every year.

ZDV aims to undercut the two largest existing dividend ETFs – the iShares Dow Jones Canada Select Dividend ETF (TSX: XDV) and the Claymore S&P/TSX Canadian Dividend ETF (TSX: CDZ) by charging a management fee of 0.35%. In comparison, XDV charges 0.50% and CDZ charges 0.60%. iShares also has the S&P/TSX Equity Income ETF (TSX: XEI) in its line up. XEI’s management fee is 0.55%. XDV, CDZ, XEI and ZDV yield 4.08%, 3.12%*, 4.1% and 4.25% respectively.

So, which one to choose? Other than the fact that CDZ belongs in the bottom of the pack, it is not clear which of these ETFs will be a suitable holding. CDZ’s yield is far too low for a “dividend” ETF considering XIU yields 2.36%. It’s not easy making a choice between the other ETFs because the holdings are wildly different owing to the different stock selection criteria their respective indices employ. Worse, apart from XDV which keeps turnover low by making it difficult for a holding to drop out of the selection set, the other dividend ETFs will have high turnover. But XDV is not without its own set of flaws either. Financials make up more than half the holdings and the big banks alone account for more than a third of the fund.

XDV – okay MER, low turnover but high concentration in financials and banks.
CDZ – high MER, high turnover, low dividend yield.
ZDV – low MER, high turnover (?), new fund
XEI – high MER, high turnover, well diversified, relatively new fund, low volume.

* – Originally, CDZ’s yield was reported as 2.78%. It was incorrect. Thanks to reader DM for pointing it out.

This article has 25 comments

  1. Hey CC, I’m starting to wonder about the obsession with dividend-weighted ETF, especially amongst the young(er) investment crowd. In my mind, those who are investing almost exclusively in registered vehicles (i.e., RRSPs, TFSAs, and RESPs) shouldn’t be focussed so much on dividends as they should be on total return, as the dividend tax credit has no impact in such accounts.

    I could see how an older investor (in no way an insult, CC 🙂 ) would care about dividends due to their tax advantages. Do you think a younger investor place more focus on simpler market-cap weighted index ETFs, such as XIU or XIC? All the research I have seen seems to point in that direction.

    Thanks for the nice read,


    • Hi Raman: Absolutely! I don’t understand the obsession with dividends among those still working either, especially investing for dividends in a taxable account! For all investors, it is total returns that matter. And for those who are in an asset accumulation stage and are likely remain so for a long period of time, it doesn’t make much sense to invest for the cash flow because they already have the cash flow. In fact, they are likely saving money and adding funds to the portfolio. A 5% dividend yield that fully qualifies for the dividend credit will still cost at least 1% in taxes every year for an Ontarian earning $80K or more. Holding XIU/XIC instead will cut the taxes paid by half and over time the difference will compound.

      I suppose the argument is that holding dividend stocks helps in the behavioural sense. i.e. when stocks tank, getting regular dividend checks helps cushion the blow. I’m not sure how valid this argument is. Stocks can fall a lot in a hurry, much more than a stock can pay in dividends over many years. It will be hard to focus on the dividends when the price losses are much more.

      I hold XIU in taxable accounts. In fact, I took advantage of the market downturn of 2008/09 to dump all the stocks in taxable portfolios (mostly banks) and moved to XIU.

      PS: I’m not all that older. I’ll be 38 in a few weeks and with 3 kids, I see working for a long time yet 🙂

  2. Hi CC, how did you determine that CDZ is yielding 2.78% ?

  3. Hi CC, one other point – in terms of total return to fund holders, CDZ has outperformed XDV over any time frame one wishes to test (e.g. 1 year, 2 year, 5 year, since inception, etc.) since CDZ’s launch in Sept. 2006. I have no vested interest in CDZ – just wanted to point that out.

  4. Wait a second. So, Dividends aren’t that great for people working and accumulating assets because the tax advantage is lost on the deferral accounts, and it doesn’t work well as income outside the deferral accounts. Dividends also seem not that great for retirees because most government retirement benefits are calculated on net income, which will include the grossed up dividend but not the credit.

    So in what cases are they useful, other than in measures of total return?

  5. @Traciatim: Retirees would likely be ok with dividends even with taxes and clawback of benefits because they may need the income to pay the bills. And for the vast majority who are not subject to the GIS or OAS clawback, the grossed up dividends may not be a big issue. Of course, one could also sell stocks, so even retirees have ways other than dividends to generate income.

  6. 2 things;

    1 Dividends and div growth portend well for the future stock price. (See Norm Rothery’s various articles in Moneysense)

    2. CDZ weeds out dividend cutters; Ie no banks at present. I do not see that turnover as “horrendous”

    I fear that you are obsessed .with “hoding” (ignoring) FOREVER, based on a mis-reading of Buffet/Siegal/Bogle. I like and own CDZ for the reasons you don’t.

  7. @CC: As far as I can see the only time a retiree would want dividend income in their retirement would be if a couple’s other income (not OAS/GIS) was between $21,552 and $67,668 because dividend income would affect the claw back rates more than other sources of income. At the very least they should sit down and figure out which income types are most beneficial and if they have the option of hiding dividend income inside some type of registered account like a TFSA. Is that assumption correct, or does that matter in the grand scheme?

  8. @Dr. Dale:

    1. *Past* dividends and *past* dividend growth doesn’t portend anything. Only *future* earnings & *future* earnings growth matter for *future* stock prices.

    2. CDZ is supposed to be a passive product, which means minimal turnover. Compared to other passive products, the selection criteria ensures that turnover will be very high. Also, banks did not cut dividends. They froze dividends to fortify the balance sheet. That isn’t a bad thing. Just ask Yellow Pages which could have paid down debt instead of maintaining its dividend.

    I’m not misreading anyone. I just don’t pretend turnover doesn’t matter in taxable accounts. See for yourself by building a spreadsheet that tells you how much taxes paid every year can cost you.

    @Traciatim: I agree with your take. I also agree that retirees should take full advantage of TFSAs. Even if their transfers weren’t subject to clawback why not shelter income from taxes whenever possible.

  9. @CC Sadly you are wrong on both points. I fear that your religious zealousness for “INDEXING AS THE ONE AND ONLY TRUE GOD” has blinded you. You might re-name your blog, “Cheerleading for the Index only Crowd.” There is no place in a dividend aristocrat fund for dividend cutters or freezers, and CDZ is by definition not “PASSIVE”.

  10. Wow, someone woke up on the wrong side of the bed this morning.

  11. Can’t please everyone I guess, eh cc?

    Don’t rename the blog…. Dr. Dale seems to love it

  12. Why the name calling?

    There are reasonable arguments against these specific products, they aren’t even directed against dividend investing in general. Why not respond with your own arguments rather than resorting to slander?

  13. Sorry. (I’ll try to tone down my comments in the future).

  14. I don’t see why the turnover of securities within an ETF matters if you’re holding it in a taxable or non-taxable account. Either way, the ETF pays the tax and the value of the ETF is reduced by the share price. this share price is the same whether held by an investor in a taxable or non-taxable account. am I missing something?

    • @JRock: ETFs, just like mutual funds do not pay taxes. They simply flow through the tax obligations to the investor. The ETF will simply issue you a T5 slip and you will be responsible for the taxes.

      Distributions from foreign investments will have taxes withheld and the rest distributed to investors. But even here, you’ll receive a credit for foreign taxes paid but will likely still owe CRA taxes based on your income bracket. Investors should care deeply about tax efficiency of investments held in taxable accounts.

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  16. One big problem (for me) with XDV, and the reason I sold my holding – the distributions are all over the map. One month, 12 cents, the next, 4! I preferred it when payout was quarterly. At least one was reasonably sure of the dividend amount. (Although it still varied.) I bought some actual stocks, and some CDZ, and have been happy.

  17. Now….I know why XDV shows 7.33% yield yesterday and sometime ago only 4.03%.Does it vary so much monthly???

  18. Most recent distributions for XDV are:
    Aug, 3.6 cents/unit; Sep, 5 cents, and Oct 12.3 cents approx. Average for the quarter: 4.2% pa approx.

  19. Thanks for the clarification.

  20. Some people like dividends for the following reasons:

    Dividends are money in the hand. Once they are in your account the company can’t take them back. The stock can drop, the market can tank, but those dividends are still yours.

    You can reinvest them immediately, compounding your money, or spend them, or cash out and wallpaper your house in five dollar bills. They are still yours, even if the market tanks.

    In horizontal markets you can have money coming in, even if the equity market is going nowhere.

    You don’t have to sell stocks in order to take advantage of gains, thus creating an income stream, for spending, or reinvesting, in equities or other vehicles.

    You can enroll in dividend reinvestment plans in some brokerages and increase your share count automatically.

    Down markets means increased yields on purchases. I purchased some stocks during the 2008 low at some very high yields and they are still paying off at those high yields. One was 8% for a major Canadian bank stock. It has produced capital gains as well as the 8% yield for the past four years. XRE was purchased at 10% yield, added to the previous purchase at 5.5 % yield.

    Dividends make up a significant part of my purchasing funds. During a time when I was unable to invest new funds, I was still able to invest because of dividends, without selling shares.

    Dividend stocks, REITs and ETFs have shown to give above average returns, especially since income investment returns have dropped.

    Unfortunately, Canadian dividend ETFs and REITs are not really diversified. Canadian dividend etf’s have up to 40 stocks, REITS 16. US or global have upwards of 600 for some dividend ETFs.
    So if your complaint against dividend ETFs are based on Canadian ETFs, then I would agree they are not a great bargain for Canadian investors. For other reasons as well.

    I’m disappointed with all Canadian ETFs.
    Canadian ETFs are ridiculously over priced, the lowest three times more expensive in fees then the premiere US ETFs and that isn’t counting the many hidden costs and fees in ETFs. Many are much worse. Of course Canadians are being ripped off by our financial industry in so many ways, including higher fees for buying and selling stocks and all the other various fees. I guess in Canada “competition” doesn’t mean anything, since Canada’s banks have all settled on pretty much identical fee structures for their brokerage houses. The Canadian mutual fund industry is pretty much the same, except worse.

    Many Canadians get around withholding tax problems by using RRSPs to hold their US based ETFs.
    Unfortunately the US won’t allow TFSA to be classified as “registered” and US stocks and ETFs in a TFSA will have withholding taxes held back. I don’t know if you can get a credit on taxes withheld from a TFSA.

    Finally, it seems that many experts suggest that you shouldn’t base your investments strictly on tax advantages. You should base them on if they are good investments. I suppose, since you seem to have alternate opinions here, that might suggest that it is in fact possible for there to be multiple opinions on a single issue, and not any of them are entirely right because the issues are often very complex and different people have different requirements.
    Imagine that.

  21. Nothing like replying to a year-old post! However, this applies to me now, so here goes….

    @CC, you state that, “A 5% dividend yield that fully qualifies for the dividend credit will still cost at least 1% in taxes every year for an Ontarian earning $80K or more. Holding XIU/XIC instead will cut the taxes paid by half and over time the difference will compound.”

    I don’t understand why this is… are dividends not taxed at 50% marginal rate?

  22. @Sean: No. Dividends received from Canadian sources are first grossed up and then become eligible for the dividend tax credit. Therefore, the marginal tax rate on dividends depends on your tax bracket. You should be able to find a table showing the marginal tax rate on dividends online. Let me know if you need a reference and I’ll look it up for you.

    The 50% marginal rate is for all manner of capital gains.