For retirees, managing an investment portfolio is about striking a balance between two primary goals: ensuring the longevity of their funds so they don’t run out of money, and generating sufficient income to meet day-to-day living expenses.
Investing in individual dividend stocks might seem like an attractive option at first glance, but it comes with challenges. A single stock can be volatile; dividends can be reduced or even cut entirely in tough economic times, and most only pay out on a quarterly basis. This can lead to an unpredictable income stream, which is less than ideal for retirees who rely on their investments.
The solution? Dividend ETFs. These funds offer a diversified basket of dividend-paying stocks, spreading out the risk associated with individual companies. Moreover, many dividend ETFs pay out on a monthly basis, providing a more consistent and reliable income stream.
For those focusing on Canadian stocks, I have two ETF picks that currently yield above 4.5%. These ETFs not only offer attractive dividend yields but also diversification and a monthly payment frequency that can help retirees meet their financial goals with greater peace of mind.
iShares Canadian Select Dividend Index ETF (XDV)
My first pick for a dividend ETF tailored to the needs of retirees is iShares Canadian Select Dividend Index ETF (TSX: XDV).
This fund tracks 30 of the highest yielding Canadian companies within the Dow Jones Canada Total Market Index, making it a play on some of Canada’s most substantial dividend payers.
As of January 3, 2024, XDV boasts a 12-month trailing yield of 4.63%. To understand what this means, it’s important to grasp how the 12-month trailing yield is calculated.
This figure represents the total dividends paid by the ETF over the past year, divided by the ETF’s current share price. It’s a useful metric for assessing the past income-generating potential of the ETF, giving investors a snapshot of what they might have historically received in terms of dividend income.
The sector composition of XDV is varied, though notably weighted towards certain industries. Currently, financials are a significant portion, representing over half of the ETF’s total holdings.
However, there are aspects of XDV that might give some investors pause. Its concentration on just 30 holdings can be a double-edged sword; while it allows for targeted exposure to high-yield companies, it also increases risk compared to more diversified options. Additionally, the expense ratio of 0.55% is higher than some other dividend ETFs, which could impact net returns over time.
While XDV is a solid choice for those seeking high dividend yields within the Canadian market, its concentrated nature and higher expense ratio are factors to consider. If you’re looking for an alternative with perhaps a broader approach and lower fees, my next pick might be more aligned.
iShares S&P/TSX Composite High Dividend Index ETF
Among the dividend-focused ETFs, iShares S&P/TSX Composite High Dividend Index ETF (TSX: XEI) stands out as a superior option for retirees.
This ETF tracks the S&P/TSX Composite High Dividend Index, which comprises 75 stocks – a notably broader selection compared to the 30 held by XDV.
The sector composition of XEI is somewhat similar to that of XDV, but with a few key differences. It offers more coverage in utilities and telecommunications, sectors known for their stability and consistent dividend payments.
A standout feature of XEI is its 12-month trailing yield, which is higher than XDV’s at 5.01%. Moreover, the expense ratio of XEI is only 0.22%, significantly lower than XDV’s 0.55%.
Given these attributes – a more diversified portfolio, higher dividend yield, and lower expense ratio – I think XEI is the better dividend ETF for retirees compared to XDV.
