2 Top ETFs for Dividends

If the diversification of the portfolio and spreading out the risk of dividend cuts is more important to you than sheer yield, two ETFs should be on your radar.

| More on:
A close up image of Canadian $20 Dollar bills

Image source: Getty Images

Not all dividend ETFs are created equal. Some focus more on yield than they do on dividend sustainability, while others value a good spread of assets over everything else. The frequency of distribution might be quite important for investors as well, especially ones that are using the dividend ETF to start a passive income stream.

Monthly frequency is ideal, but it shouldn’t be the deciding factor. However, if almost everything else that two ETFs offer is relatively similar, then a monthly distribution frequency might trump a quarterly one.

The right approach when comparing different ETFs for dividends is to take all the factors into account; only then are you likely to find the top pick.

A low-risk ETF

With an MER of 0.7%, the Purpose Premium Yield Fund ETF (TSX:PYF) is not a top pick from a cost management perspective. But it might still be worth investing if it fulfills your dividend goals. The current yield it’s offering is 5.78%, and distributions are monthly. This ETF also comes with a reasonable and healthy ESG risk rating.

But dividends are the only thing this ETF offers. Its capital appreciation potential, while not non-existent, is not enough to attract investors. The dividends are its forte. The asset mix is quite interesting. Relatively few assets within the ETF are directly held by the fund, and a lot of put options are part of the mix. Cash-covered puts make up over 85% of the total portfolio weight, while the rest are equities.

A high-fee ETF

With an estimated annualized yield of 6.4% and a 12-month trailing yield of 5.1%, the Horizons Enhanced Income International Equity ETF Class E (TSX:HEJ) seems like a healthy enough dividend ETF. It also offers monthly payouts, so the frequency works out for investors seeking this ETF for a passive income. The capital appreciation potential is minimal, so the ETF has to be seen mostly through the dividend lens

The dividend-based return potential should also be contrasted with the cost you bear for investing in the dividends, and it’s one where the ETF doesn’t come out on top. The MER is currently 0.84%. So if you get 6.4% back via dividends, you will have to leave a hefty portion of it in fees.

The best part about the ETF is the geographic diversification it offers. The bulk of the portfolio weight is in the UK, Japan, and France.

Foolish takeaway

The two dividend ETFs can be quite useful elements of a passive income portfolio. They offer a lot of inherent diversification, especially the Horizon ETF, and while the fees are high, they might be bearable if you consider the sustainability trade-off. But if you are looking for decent payouts and capital appreciation, these two might not be the right ETFs for you.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Adam Othman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

More on Dividend Stocks

Canadian Dollars
Dividend Stocks

Buy 734 Shares of This Top Dividend Stock for $9,574 a Year in Passive Income

Are you looking to earn regular income? Now is an opportune time to buy Dividend Aristocrats at discounts and accelerate…

Read more »

A plant grows from coins.
Dividend Stocks

This Ultra-High Yield Stock Just Hit a 52-Week Low, and it’s Still a Buy Today

Enbridge Inc (TSX:ENB) stock recently hit a 52-week low. Here's why.

Read more »

Payday ringed on a calendar
Dividend Stocks

This 6% Dividend Stock Pays Cash Every Month

Are you looking to earn cash every month from October 15 onwards? This 6% dividend stock gives you monthly payouts.

Read more »

Person slides down a stair handrail
Dividend Stocks

With a 7.6% Dividend, This TSX Stock Is One to Buy Now and Hold for Decades

Now is an opportune time to invest in this no-brainer TSX stock and get +$30 extra dividend for decades on…

Read more »

Portrait of woman having fun in the street.
Dividend Stocks

CPP Benefits Will Be Higher for Millennials and Gen Z

Older Canadians won't get enhanced CPP, but they may invest in dividend stocks like Royal Bank of Canada (TSX:RY).

Read more »

A plant grows from coins.
Dividend Stocks

The Best Dividend Stocks in Canada Right Now

Seeking to give a boost to your income portfolio, consider investing in these best Canadian dividend stocks.

Read more »

A close up image of Canadian $20 Dollar bills
Dividend Stocks

Retirees: Want Fast-Growing Passive Income? Here Are 3 Long-Term Dividend Stocks

Are you looking for dividend stocks that can grow their distributions very quickly? Here are three long-term picks!

Read more »

dividends grow over time
Dividend Stocks

2 Top Dividend Stocks You Can Buy and Hold Forever

The market is full of great dividend stocks, but not all are long-term gems. Here are two options that you…

Read more »