It’s no secret that I like dividends.  I’ve been using the dividend growth investing method for several years now and plan on collecting dividend income long after I reach retirement age.

As ETF’s have increased in popularity I have been getting more questions about buying a dividend ETF.  Why spend all of that time researching individual dividend stocks when you can just buy a dividend ETF like CDZ or XDV?  A dividend ETF holds a broader selection of dividend stocks according to the index it tracks.

Choosing a Dividend ETF

The two most popular dividend ETF’s in Canada are iShares XDV and Claymore’s CDZ.  Let’s take a look at what each of these ETF’s are holding:

iShares XDV – This dividend ETF seeks to provide long-term capital growth by replicating the performance of the Dow Jones Canada Select Dividend Index.  XDV holds 30 of the highest yielding dividend paying stocks in Canada.

XDV is heavily weighted towards the financial sector (51% of the fund), telecommunications sector (14.5% of the fund) and the oil & gas sector (13% of the fund).  The top 5 holdings are CIBC, Bonterra Energy, National Bank, Bank of Montreal and TD Bank.

XDV has a management expense ratio of 0.5% and has returned 6% annually over the past 5 years.  The annual dividend is $1.39, giving XDV a yield of 6.30%

Claymore’s CDZ – The dividend ETF has been designed to replicate the performance of the S&P/TSX Canadian Dividend Aristocrats Index.  To qualify for the Dividend Aristocrats Index a dividend stock must have increased dividends every year for at least 5 consecutive years.  At this time, CDZ holds 39 individual securities.

Because the big Canadian banks failed to raise their dividends during the financial crisis in 2008-2009, CDZ is much more diversified than XDV.  The top 3 sector holdings in CDZ include the Oil & Gas sector (24%), the Industrial Products sector (17%) and the Consumer Services sector (15%).  Bird Construction, Enbridge Income Fund, North West Co., Keyera Corp and AGF Management are the top 5 individual holdings.

CDZ has a management expense ratio of 0.60% and has returned 6.14% since inception of the fund (9/8/2006).  The annual dividend is $0.66 and the yield is 3.10%

Dividend ETF vs. Dividend Stocks

The point of an ETF is to allow investors to track all of the stocks in an index, capturing returns from the entire market (minus fees).  The problem with choosing a dividend ETF like XDV or CDZ is that their holdings are not very broad or diverse.

Both of these ETF’s have their flaws.  XDV is poorly diversified, with financials, energy and telecommunications making up nearly 80% of the fund.  CDZ has more diversification, but is missing some key dividend stocks due to their requirement of needing to raise dividends annually for 5 consecutive years.

I like the theory behind holding a dividend ETF, and if I were just starting out learning how to invest I would definitely purchase one or both of these funds while I built up my portfolio.  But once my investment portfolio reached $50k or $60k I would start to purchase individual dividend growth stocks and replicate a dividend ETF on my own.

As it stands, my aim is to get my investment portfolio up to around 25-30 stocks.  This way, I hold the securities that fit with my investment style and criteria while saving money on fees over time.

Do you own a dividend ETF, or do you prefer buying your own individual dividend stocks?

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