I think dividend exchange-traded funds (ETFs) are the best tool for passive income. The main reason? Diversification.
A single high-yielding stock can be risky. If something goes wrong – like a dividend cut – you’re fully exposed. But a basket of 50 or more dividend stocks across different sectors? Much lower risk.
On top of that, most dividend ETFs pay monthly, while individual stocks typically pay quarterly – which is a huge plus for passive income investors.
Here’s a look at two of my favourite dividend ETFs from iShares, both of which pay monthly and yield more than 4.5%.
Canadian dividend stocks
First up is the iShares S&P/TSX Composite High Dividend Index ETF (TSX:XEI).
This ETF takes the S&P/TSX Composite Index and selects the 75 highest-yielding stocks, creating a portfolio tilted heavily toward financials and energy – the two dominant sectors for dividends in Canada.
As of February 6, XEI offers a 4.9% distribution yield. This metric is calculated by taking the most recent monthly distribution, annualizing it, and dividing it by the current share price. It gives investors a forward-looking estimate of what they can expect to earn in dividends over the next year.
All this comes at a fairly affordable 0.22% management expense ratio (MER) – meaning for every $10,000 invested, you’d pay just $22 per year in fees.
Canadian REITs
One thing XEI doesn’t have too much exposure to is real estate stocks in the form of REITs (Real Estate Investment Trusts).
A REIT is a company that owns and manages income-producing real estate. These can include residential apartments, office buildings, retail shopping centres, warehouses, and industrial properties.
REITs are legally required to pay out most of their earnings as dividends to maintain their tax-sheltered status, which is why they tend to offer higher yields. An ETF holding REITs follows the same principle but with greater diversification, reducing the risk of relying on a single real estate sector or company.
The best ETF for this in my opinion is the iShares S&P/TSX Capped REIT Index ETF (TSX:XRE).
It’s a bit pricier, with a 0.61% expense ratio, but right now, it’s paying a 5.4% distribution yield, making it an attractive option for income-seeking investors looking for exposure to real estate.
