Dividend investing is a proven, time-tested strategy to create extra income. If you’re investing in Canada, the Toronto Stock Exchange is the premiere supermarket for stocks. However, income-oriented investors who want to do away with individual stock selection can opt for exchange-traded funds (ETFs).
The best part about ETFs is diversification with the flexibility of stock trading. But instead of shares of underlying assets, you own units of the ETF. Depending on risk appetite, you can choose to invest in broad market indexes and specific or niche sectors.
December 2024 is a good time to invest because of TSX’s resiliency (+22.42% year to date) and positive outlook for 2025. My top two favourite Canadian ETFs this month are BMO Equal Weight Banks Index ETF (TSX: ZEB) and Global X Canadian Utility Services High Dividend Index ETF (TSX: UTIL). Besides their medium-risk ratings, ZEB and UTIL pay decent dividends every month.
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Bedrock of stability
BMO Equal Weight Banks Index ETF replicates the Solactive Equal Weight Canada Banks Index’s performance to the extent possible. This ETF is favourable, if not ideal, for long-term investors because of the exposure to Canadian banking giants. BMO Global Asset Management manages the fund, too.
At $43.18 per unit, current investors delight in the +27.17% year-to-date gain on top of the 3.89% dividend yield (annual). ZEB invests in the Big Six banks in Canada in nearly equal weight to lessen specific security risks.
The financial services sector (+27.77% year to date), including bank ETFs, received a boost following the Bank of Canada’s fifth consecutive rate cut. Effective December 11, 2024, the central bank’s policy rate is down to 3.25%. The governing council believes the 50 basis points cut will support growth and keep inflation near the 1-3% target range.
There could be a domino effect after the reduction, especially in the real estate sector. Lower borrowing costs will stimulate housing market demand.
More importantly, there is confidence in investing in ZEB and owning all big bank stocks, not just one. The Canadian banking sector has endured the worst financial crises and remains a bedrock of stability.
Defensive industries
Global X Canadian Utility Services High Dividend Index ETF is a dividend-focused but defensive holding. Global X Investments Canada invests in TSX-listed utility service companies, pipeline operators, and telecommunication firms as the investment manager. At $22.01 per unit, the dividend offer is 4%.
UTIL’s salient characteristic is stability during volatile market conditions. Stocks are equally weighted in different sectors (utility, energy, and communications services). The top holdings include Dividend King Fortis, pipeline giant Enbridge, telco titan BCE, and Brookfield Infrastructure Partners.
According to Global X, UTIL is mainly for dividend investors who can handle the spikes and dips of the stock market. The ETF’s trailing one-year price return is 13.05%, notwithstanding last year’s high-interest rate environment.
Perfect combination
ZEB and UTIL combine the banking industry’s strong fundamentals and defensive sectors’ low-risk profile. With two professional fund managers, you can’t ask for more. The monthly payouts should be safe and steady.
