I’m a strong advocate for dividend ETFs, especially for Canadian investors, because they eliminate the complexity of selecting individual dividend stocks.
These ETFs typically track external, transparent indexes, which clearly outline the criteria and metrics used for selecting their holdings. This approach provides investors with a clear understanding of how stocks are chosen and managed.
However, it’s important to recognize that not all dividend ETFs are alike. Among the options available, one that stands out for its effectiveness and appeal is iShares Core MSCI Canadian Quality Dividend Index ETF (TSX:XDIV).
This ETF has garnered attention for its strategic approach to selecting high-quality Canadian dividend-paying stocks. Here’s a closer look at what makes XDIV an attractive choice for those looking to incorporate dividend investments into their portfolios.
XDIV: Pros
XDIV stands out for several compelling reasons, making it a prime choice for dividend investors. At its core, it prioritizes what I consider the “holy trinity” of dividend investing: quality, yield, and growth.
This approach ensures that investors are not just chasing high yields but are investing in fundamentally strong companies capable of sustaining and growing their dividends over time.
Quality: XDIV assesses the financial health of the companies it includes. By examining factors like profit margins and payout ratios, the ETF ensures that its holdings are financially robust, reducing the risk of dividend cuts in adverse market conditions.
Yield: High yield is a significant draw for dividend investors, and XDIV does not disappoint. With a focus on ensuring a high distribution yield, currently at 5.9% as of April 4, it provides an attractive income stream for investors looking for substantial dividend payouts.
Growth: It’s not just about the current yield but also about the potential for growth. XDIV includes companies with a history of stable or increasing dividends, promising not just immediate income but also the prospect of growing payouts in the future.
In addition to these core attributes, XDIV is notably cost-effective. With an expense ratio of only 0.11%, or $11 annually for a $10,000 investment, it’s an economically savvy choice for cost-conscious investors.
Moreover, XDIV offers the convenience of monthly distributions, a feature particularly appealing compared to the more common quarterly payouts of individual dividend stocks.
XDIV: Cons
While XDIV has many strengths, it’s important to acknowledge a few limitations that investors should consider.
One of the notable drawbacks is its somewhat concentrated portfolio, currently comprising only 15 stocks. Such a narrow selection might not offer the level of diversification desired by some investors.
Another aspect to be mindful of is its sector weighting. Currently, XDIV has a significant portion of its assets allocated to specific sectors: 42% in financials, 24% in energy, and 17% in utilities.
Given these considerations, if you’re inclined to invest in XDIV, it would be prudent to balance your portfolio with additional stock picks from the underrepresented sectors and geographies (and the Fool has some excellent suggestions below!)
