Dividend stocks aren’t defensive just because they pay out income. The cash comes out of the share price, all else being equal—it’s not free money.
What actually makes dividend stocks defensive is the quality of the businesses behind them. Longstanding blue-chip companies that maintain or grow their dividends tend to be resilient, with strong balance sheets and the ability to navigate economic cycles and disruptions—including Trump’s tariffs.
As a Canadian investor, you can access some of the best dividend stocks in the country through exchange-traded funds (ETFs). Here are two from BMO Global Asset Management that I like.
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BMO Canadian Dividend ETF
First up is BMO Canadian Dividend ETF (TSX: ZDV), which holds a portfolio of around 50 Canadian dividend stocks.
Unlike many dividend ETFs, it doesn’t follow an index. Instead, BMO uses its own proprietary rules-based screening system to select stocks based on three key factors: three-year dividend growth rate, dividend yield, and payout ratio to ensure the dividends are sustainable.
I like this approach because it covers all three pillars of dividend investing—dividend growth, dividend yield, and dividend quality. That makes it less one-dimensional than other dividend ETFs that simply chase high yields or focus solely on dividend history.
Right now, ZDV is paying a 3.77% annualized distribution yield with monthly payouts. All this comes at a 0.39% annual expense ratio.
BMO Canadian High Dividend Covered Call ETF
If you want a higher yield than what ZDV provides, an alternative is BMO Canadian High Dividend Covered Call ETF (TSX: ZWC).
ZWC selects stocks using a similar methodology to ZDV, focusing on dividend growth, yield, and payout ratio, but it enhances income generation through a covered call strategy.
This strategy sells call options on a portion of the ETF’s holdings, which effectively converts some future price appreciation into immediate income. While this means you sacrifice some potential share price growth, you get more income upfront.
As a result, you shouldn’t expect ZWC’s share price to appreciate as much as ZDV’s over time, but in exchange, it offers a higher 6.73% distribution yield, paid monthly. That being said, options strategies come with higher costs, and ZWC’s expense ratio of 0.72% reflects this.
The Foolish takeaway
I think a good strategy is to hold ZWC in a Tax-Free Savings Account (TFSA) and ZDV in a Registered Retirement Savings Plan (RRSP).
ZWC’s higher 6.73% yield makes it a great fit for a TFSA, where you can withdraw those covered call-enhanced dividends tax-free for passive income whenever you need them.
Meanwhile, ZDV’s focus on dividend growth makes it better suited for an RRSP, where those reinvested dividends can compound tax-free for decades, building a larger retirement nest egg over time.
By using both Canadian dividend ETFs strategically, you can maximize current income while also setting yourself up for long-term wealth accumulation.
