Investing in quality dividend stocks can help you create a steady and recurring stream of passive income for life. It’s essential to identify a portfolio of dividend-paying companies across various sectors, which will provide you with diversification across market cycles. Further, these companies should have strong fundamentals, sustainable dividend payouts, and stable cash flows, enabling them to maintain dividends over time.
The ideal dividend stocks are those that grow earnings consistently each year, resulting in dividend raises and increasing your effective yield in the process. However, identifying individual dividend stocks is quite an exhaustive process as you need to analyze a company’s economic moats, pricing power, profit margins, debt levels, and much more.
So, if you don’t have the expertise or time to evaluate individual stocks, you should consider investing in dividend-paying exchange-traded funds, or ETFs. Typically, ETFs provide investors with access to a diversified pool of assets, including stocks, bonds, and cryptocurrencies.
It means investing in equity-backed ETFs will help can gain exposure to a portfolio of stocks at a low cost. There are several ETFs trading on the TSX, and a few of these funds even provide you with a dividend, which is paid every quarter or each month (in some cases).
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What are the benefits of investing in Canadian dividend ETFs?
Similar to stocks, ETFs are traded on a stock exchange and are easy to buy or sell. You can buy dividend ETFs in a brokerage account and choose to either reinvest or withdraw the dividends you receive.
Over the years, Canadian ETFs that offer a dividend have managed to outpace inflation and deliver steady returns to shareholders.
A significant portion of Canada’s large-cap companies are part of sectors such as energy and banking, where they offer shareholders a tasty and attractive dividend yield. Several blue-chip stocks enjoy entrenched positions, a wide economic moat, pricing power, and strong fundamentals, allowing them to thrive across market cycles.
Further, dividends earned in Canada are taxed in a friendly way. For instance, dividends are sheltered from taxes if held in registered accounts such as the Tax-Free Savings Account. It means you can use the TFSA to create a tax-free passive-income stream.
One quality dividend ETF in Canada is iShares Core MSCI Canadian Quality Dividend Index ETF (TSX: XDIV). Let’s see why.
Should you invest in the XDIV ETF right now?
The XDIV ETF has returned 9.6% annually in the last five years, which is quite attractive. With $910 million in assets under management, it provides investors with a dividend yield of 4.7%. It’s a low-cost ETF, given the XDIV has an expense ratio of 0.11% and management fees of 0.10%.
This dividend ETF has a monthly payout and holds TSX giants such as Royal Bank of Canada, Manulife Financial, Pembina Pipeline, Sun Life Financial, and Toronto-Dominion Bank, which account for 45.7% of the fund.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| iShares Core MSCI Canadian Quality Dividend Index ETF | $25.58 | 809 | $0.103 | $83.32 | Monthly |
The Foolish takeaway
The XDIV ETF pays unitholders an annual dividend of $1.236 per unit. So, you need to buy 809 units of the ETF to earn $1,000 in annual dividends. At today’s price, the total investment will cost you $20,695, which is not too much given that you hold some of the largest TSX companies in your portfolio.
Further, the ETF has raised dividends by 6.2% annually in the last six years, enhancing your effective yield over time.
