2 Canadian ETFs to Buy and Hold Forever in Your TFSA

These monthly dividend ETFs are great for a TFSA.

Tony Dong, MSc, CETF®

Author Bio Tony turned a series of marijuana stock losses in 2017 into a self-employment venture, focused on helping retail investors build better portfolios with exchange-traded funds (ETFs). He is the founder of ETF Portfolio Blueprint and the Lead ETF Analyst for ETF Central, a partnership between Trackinsight and the New York Stock Exchange. He also currently writes freelance for MoneySense, U.S. News & World Report, Kiplinger, and 24/7 Wall St., and runs an investing-focused newsletter called The Dumb Money Dispatch with 3,300+ subscribers. Outside of finance, Tony owns a small ranch in rural British Columbia, raising goats and chickens, and also volunteers as a wildland firefighter in his local community. His background includes service in the Canadian Armed Forces as a reservist and stints in corporate security. Education Master of Science (MSc) in Enterprise Risk Management, Columbia University Bachelor of Arts (BA) in Criminology, Simon Fraser University Certified ETF Advisor (CETF®), The ETF Institute Securities Industry Essentials (SIE), FINRA Canadian Securities Course (CSC), Canadian Securities Institute Areas of Expertise ETFs, mutual funds, Berkshire Hathaway, indexing, dividend stocks, royalty trusts, REITs, infrastructure, aerospace & defence, passive income investing, portfolio construction, risk management, RRSPs & TFSAs. Social Media Profiles https://www.linkedin.com/in/tzld96/ https://www.youtube.com/@okanaganhomesteader Favorite Investment Quote "Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1." - Warren Buffett

Published August 23, 2024 3:30 pm EDT

Most Canadian stocks offer fairly tax-efficient returns due to the dividend tax credit and gross-up mechanism, but you’ll still forfeit a portion of your dividends to taxes.

If you’re looking to retain all your dividend earnings, placing your Canadian investments in a Tax-Free Savings Account (TFSA) is a good idea, unlike U.S. stocks, which are subject to a 15% withholding tax on their dividends.

For those new to dividend investing, starting with an exchange-traded fund (ETF) can simplify the process. Here’s a look at two ETFs ideal for a TFSA—one focused on high-yield dividends and the other on growth, both paying monthly income.

The dividend growth option

First up is iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (TSX: CDZ), which targets Canadian dividend stocks that have consistently increased their dividends for at least five consecutive years.

While U.S. Dividend Aristocrats typically need a 25-year history of dividend growth, Canada’s smaller market size modifies this requirement to just five years.

Currently, CDZ holds 91 stocks, primarily focused on the financial and energy sectors, which dominate the Canadian market. However, it also has meaningful allocations to industrials, utilities, real estate, and telecom sectors.

The emphasis on dividend growth means its yield is moderate but still attractive at 3.91% for the trailing 12 months.

The primary drawback of CDZ is its fee structure: a management expense ratio (MER) of 0.66% is on the higher side, particularly for a dividend-focused index ETF.

The high-yield dividend option

The alternative to CDZ for those seeking higher current yields is iShares S&P/TSX Composite High Dividend Index ETF (TSX: XEI).

Unlike CDZ, which focuses on dividend growth, XEI targets Canadian stocks that offer higher-than-average dividend yields. This allows the ETF to offer a robust 5.27% trailing 12-month yield.

Currently, XEI manages a portfolio of 75 holdings, predominantly concentrated in the energy and financial sectors, with meaningful allocations to utilities and communications as well.