Are you tired of paying taxes on every penny you make? Lucky for you, there’s a thing called a Tax-Free Savings Account (TFSA), which lets you make withdrawals without the Canada Revenue Agency knocking on your door. And with the contribution limit for 2023 now at $6,500, it’s time to get that passive income going.
But hold up. Before you go maxing out your TFSA with any old stock, let’s talk about Canadian dividend stocks. These stocks are totally tax free in your TFSA, unlike U.S. dividend stocks, which are subject to a 15% foreign withholding tax. So, stick with the Canadian ones.
Now, I know what you’re thinking: “Most Canadian dividend stocks pay out quarterly, and I need my money on a monthly basis!” Don’t fret, because I’ve got the solution: dividend exchange-traded funds — aka ETFs. These ETFs hold a portfolio of diversified dividend stocks that pay out every month like clockwork.
The best part? You don’t have to lift a finger. No research, no effort, just sit back and watch the money roll in. So, without further ado, here are my top two ETF picks for all the couch potato investors out there.
Chasing high yields
The most straightforward Canadian dividend ETF you can opt for is iShares S&P/TSX Composite High Dividend Index ETF (TSX:XEI). This ETF does what its name says: it holds a portfolio of high-yielding Canadian dividend stocks based on an index. It’s as simple and transparent as dividend investing gets.
XEI currently holds 75 large-cap TSX stocks. 31% of them come from the financial sector, while 21% come from the energy sector. Right now, the ETF pays a 12-month yield of 4.59%, which is the yield an investor would have received if they’d held XEI over the last year, based on the current share price.
XEI isn’t just about dividends either. Thanks to its solid portfolio of companies, the ETF has also historically demonstrated decent share price growth. With dividends reinvested, XEI has returned an annualized 7.58% over the trailing 10 years up to January 31, 2023.
Targeting Dividend Aristocrats
The more complicated way to screen dividend stocks is by assessing their historical dividend growth instead of present yields. This approach can help identify solid companies that have a track record of increasing dividend payments consecutively year over year.
To target these stocks without doing extensive research, an investor can buy iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (TSX:CDZ). This ETF holds 91 Canadian stocks that have increased their dividend payouts every year for at least five consecutive years.
Currently, CDZ has a trailing 12-month yield of 3.69%, which is lower than XEI but is to be expected given its different strategy. Its portfolio also looks markedly different. While financial stocks are still the largest holding at 30%, the second largest is industrials at 11%, followed by real estate at 10%.