May is here, and with it comes Canadians’ chance to turbocharge Tax-Free Savings Accounts (TFSAs) with this year’s $7,000 contribution limit. Imagine turning that chunk of cash into a passive income powerhouse, or even doubling it, while you sleep. This may sound too good to be true, but not when you harness the power of dividend exchange-traded funds (ETFs).
These low-cost, professionally managed baskets of stocks let you tap into decades of dividend growth and market resilience without lifting a finger. Whether you’re building a retirement nest egg or craving monthly tax-free cash flow, we’ve got two Canadian ETFs that deserve a spot in your TFSA this May. Let’s dive in!
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iShares S&P/TSX Canadian Dividend Aristocrats Index ETF
Since its inception in 2006, the iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (TSX:CDZ) has offered TFSA investors low-cost access to a curated portfolio of large, well-established Canadian companies that have successfully raised their common share dividends every year for the past five consecutive years.
With this BlackRock-managed ETF, TFSA investors could generate growth through equity investing, earn generous tax-free dividends from the ETF’s portfolio of Canada’s most prestigious dividend-paying stocks with a track record of increasing dividends. The ETF pays monthly dividend cheques that currently yield 4.3% annually.
While a 19.3% total return during the past year appears an outlier, the ETF has generated a respectable 7% compound annual return during the past decade. Past performance isn’t predictive of future returns; however, the ETF’s strategy has demonstrated its capacity to grow retirement assets and generate passive income every month.
The ETF’s portfolio has more than $920 million in net assets invested across 90 diversified holdings. Financial sector stocks dominate the fund with a sector weight of 23%, followed closely by energy (14.7%), real estate (12.5%), communication (11.9%), and utilities (10.6%), with many other sectors represented as well.
Most noteworthy, TFSA investors will incur low management costs given a management expense ratio (MER) of 0.66%, or just $6.60 per $1,000 invested. Investors have an option to fully reinvest all dividends into additional ETF units through a dividend reinvestment plan (DRIP), smoothing the tax-free wealth-compounding process.
Vanguard FTSE Canadian High Dividend Yield Index ETF
The Vanguard group has a nicely packaged competing offering to the BlackRock dividend ETFs in the Vanguard FTSE Canadian High Dividend Yield ETF (TSX:VDY), a much larger dividend income-producing fund with more than $3.5 billion in total assets invested across 63 holdings. The Vanguard ETF targets holding positions in Canadian companies characterized by high dividend yield, and it’s attracting significant interest from Canadian investors, receiving an additional $255 million in new net investments year-to-date.
Incepted in November 2012, the Vanguard FTSE Canadian High Dividend Yield ETF continues to pay monthly dividends more than a decade on. The current payouts for May yield approximately 4.4% annually, while dividends over the past 12 months yielded 4.1%.
It’s a passively managed index ETF that tracks the FTSE Canada High Dividend Yield Index, and investors pay remarkably low management fees. With a MER of 0.22%, TFSA investors may incur about $2.20 in total management fees per $1,000 invested, annually.
Past performance has been very good. A $10,000 investment in the VDY ETF five years ago could have grown to more than $21,000 today, with dividend reinvestment. The ETF could have doubled investors’ money during the past five years
Financials dominate the ETF with a 52.5% weight in the portfolio, followed by energy stocks with a 29.4% weight.
Investor takeaway
Canadian ETFs can effortlessly diversify your $7,000 TFSA contribution, grow your retirement nest egg while you sleep, and pay you juicy monthly dividends that may help pay the bills. That said, some individual stocks with very high growth potential could richly reward long-term oriented investors and grow TFSA balances faster. Be on a constant lookout for those. Stay hungry.
