4 Passive Income ETFs to Buy and Hold Forever

These 4 funds are ideal for long-term investors seeking to simplify the process of investing in high-quality, dividend-paying companies while achieving diversification.

Amy Legate-Wolfe

Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances. Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities. She also provides investors with a daily newsletter, Canada Stock Digest, for daily market updates. Before joining Motley Fool Canada, she wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog, and travel with her husband. Follow Amy on LinkedIn and Canada Stock Digest. Favorite Investment Quote: “October: This is one of the particularly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

Published January 15, 2025 5:00 pm EST

When it comes to building passive income, exchange-traded funds (ETFs) on the TSX are among the most convenient and reliable options. These funds simplify the process of investing in high-quality, dividend-paying companies while offering diversification, thusly making them ideal for those looking to buy and hold investments for the long term. Let’s dive into four strong candidates for passive income ETFs on the TSX, discussing recent earnings, past performance, and future potential.

ETF stands for Exchange Traded Fund — Source: Getty Images

XEI

One standout option is the iShares S&P/TSX Composite High Dividend Index ETF (TSX:XEI). This ETF is managed by BlackRock and provides exposure to some of Canada’s best dividend-paying companies.

XEI is built on the foundation of the S&P/TSX Composite High Dividend Index, which selects high-yielding companies while ensuring diversification by limiting individual holdings to a 5% cap and sector exposure to no more than 30%. This structure reduces the risk of over-concentration while maintaining consistent dividend payouts. As of writing, XEI has a distribution yield of approximately 5%, with a year-to-date return of 19%, showcasing its reliability as a passive income generator. Its portfolio includes a mix of financials, energy, and utilities, sectors known for their income stability.

VDY

Another strong contender is the Vanguard FTSE Canadian High Dividend Yield Index ETF (TSX:VDY). This ETF tracks the FTSE Canada High Dividend Yield Index, focusing on companies with the most substantial dividend yields in the country. Its portfolio leans heavily on financials and energy, sectors that dominate the Canadian economy and offer dependable dividends.

What makes VDY appealing is its low management expense ratio (MER) of 0.22%, which means investors get to keep more of their returns. With a distribution yield of 4.3%, VDY is a dependable choice for those who prefer consistent income over flashy, high-risk investments. Its historical performance has been steady, and its exposure to established blue-chip companies makes it a solid option for long-term investors.

ZDV

For those looking for a slightly different approach, the BMO Canadian Dividend ETF (TSX:ZDV) provides another excellent choice. This ETF focuses on yield-weighted portfolios of Canadian companies, emphasizing dividend sustainability, growth, and healthy payout ratios.

With a MER of 0.39%, ZDV costs a bit more than traditional index funds, yet justifies this with its curated selection of dividend stocks. Around 40% of its portfolio is allocated to financial companies, including major banks and insurance providers. These have proven resilient even during economic downturns. ZDV’s distribution yield has remained attractive. Plus its emphasis on financials positions it to perform well over the next 18 months, particularly if the banking sector continues to stabilize and grow.

HDIF

For investors seeking higher yields and more diversification, the Harvest Diversified Monthly Income ETF (TSX:HDIF) offers a unique solution. This ETF provides exposure to nine other ETFs across multiple sectors, including technology, healthcare, financials, and utilities.

By employing a covered call strategy on up to one-third of its portfolio, HDIF enhances its income-generating potential, all while maintaining exposure to growth sectors. Its current distribution yield is nearly 10%, which is exceptional for an ETF. The combination of high income and diversification makes it an appealing choice for investors looking to maximize their passive income, without relying too heavily on any single sector or market trend.

Foolish takeaway

Holding these ETFs over the long term provides not only income but also peace of mind. Their diversified exposure, professional management, and alignment with income-focused strategies make them reliable tools for achieving financial goals. Whether you’re saving for retirement, supplementing your income, or simply looking to grow your wealth passively, these ETFs offer a mix of stability and growth that’s hard to beat.

The key takeaway is that passive income doesn’t have to be complicated. With these ETFs, you can create a portfolio that generates consistent returns, adapts to changing markets, and requires minimal ongoing effort. By investing in funds like XEI, VDY, ZDV, and HDIF, you’re positioning yourself to enjoy the benefits of dividend investing without the stress of constant portfolio management. These ETFs are designed to do the heavy lifting, leaving you free to focus on other priorities while your investments work for you.