The Rise of Dividend ETFs in Canada: A New Era of Investment?

Dividend stocks are great, but dividend ETFs have surged in popularity. And this is a great one to pick up today.

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As economic uncertainty looms over Canada, more investors are turning to dividend exchange-traded funds (ETFs) to secure their financial futures. These investment vehicles offer a unique blend of diversification, income generation, and cost-effectiveness, making them an increasingly popular choice in the face of potential economic headwinds.

One such prominent dividend ETF on the TSX today that stands out as a solid choice is Vanguard FTSE Canadian High Dividend Yield Index ETF (TSX:VDY). It’s boasting a dividend yield of 4.18% and a management expense ratio (MER) of 0.20%. In this article, we’ll explore the reasons behind the surge in the popularity of dividend ETFs in Canada.

Lower risk from diversification

In uncertain economic times, risk management becomes paramount for investors. Dividend ETFs offer a way to reduce risk by diversifying their holdings across a basket of dividend-paying stocks. By investing in multiple companies rather than relying on individual stocks, investors can cushion themselves against the impact of a poorly performing stock. This diversification strategy is particularly attractive to those who fear the potential fallout of a recession.

In a low interest rate environment, where traditional fixed-income investments may yield less, dividend ETFs are increasingly appealing. These funds also provide investors with a regular and steady stream of income. Typically, dividends are paid quarterly, ensuring that investors receive a reliable income source. This feature is not only attractive to retirees looking for supplemental income but also to a broader audience seeking stability in uncertain times.

Yet one of the most compelling reasons for the growing popularity of dividend ETFs is their cost-effectiveness. Investors are often drawn to ETFs because of their low management expense ratios. These fees are typically a fraction of the costs associated with actively managed funds, allowing investors to keep more of their returns. As financial prudence becomes even more crucial during uncertain economic periods, the affordability of ETFs is a major draw for many investors.

Growing in popularity

The rise of dividend ETFs is well-documented in the Canadian financial landscape. According to the Canadian ETF Association, dividend ETFs in Canada managed assets worth over US$20 billion at the close of 2022, a significant surge from the less than US$10 billion held just a few years prior. This sharp increase in assets under management is a clear reflection of the trust Canadian investors are placing in dividend ETFs.

Moreover, the number of new dividend ETFs launched in Canada provides additional evidence of their growing popularity. In 2022 alone, over 20 new dividend ETFs were introduced to the market, surpassing the launch of any other type of ETF. This trend indicates that both investors and fund providers see the value in dividend ETFs.

Consider VDY ETF

One standout option in the Canadian dividend ETF landscape is the Vanguard FTSE Canadian High Dividend Yield Index ETF. This ETF tracks the FTSE Canadian High Dividend Yield Index, which consists of 100 Canadian stocks with the highest dividend yields. VDY boasts a trailing yield of 4.18%, providing investors with an attractive income stream. Additionally, its MER of 0.20% makes it an affordable choice for those looking to keep their investment costs in check.

Shares are now just lower than where they were a year ago. This is reflective of how the market has performed overall. Therefore, investors can likely get a strong return in the near future, along with a solid dividend.

Bottom line

The growing popularity of dividend ETFs in Canada can be attributed to their ability to mitigate risk through diversification, generate a consistent income stream, and do so at a relatively low cost. These investment vehicles are gaining momentum in the face of economic uncertainty, offering a lifeline for investors seeking to secure their financial futures.

With assets under management surging and a steady stream of new dividend ETFs entering the market, it’s clear that Canadians are placing their trust in these financial instruments. As the economic landscape remains on edge about the potential for a recession, dividend ETFs are emerging as a reliable choice for income and stability. The Vanguard FTSE Canadian High Dividend Yield Index ETF continues to lead the pack as a solid choice for those looking to invest in the Canadian market.

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 Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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