For a passive-income exchange-traded fund (ETF) to qualify as a buy-and-hold forever investment for me, it has to meet a few clear criteria. First, low fees matter. An expense ratio of 0.25% or less ensures that the income you receive is not slowly eaten away year after year. Fees compound negatively, and income strategies are especially sensitive to that drag.
Second, tax efficiency matters. Canadian dividend ETFs that primarily pay eligible dividends are easier to live with over long periods, especially outside registered accounts. Inside a TFSA, the benefit is even cleaner. Third, the ETF should pay monthly and deliver a yield above the Bank of Canada’s policy rate. If the goal is income, it needs to show up regularly and meaningfully.
In my opinion, the following two Canadian dividend ETFs fit these criteria well: one from Vanguard and one from iShares.
Source: Getty Images
The Vanguard option
Vanguard FTSE Canadian High Dividend Yield Index ETF (TSX: VDY) is a straightforward, rules-based income ETF.
VDY selects Canadian stocks that rank in roughly the top half of their universe by dividend yield. The portfolio spans large-, mid-, and small-cap companies, but in practice, it is concentrated in financials and energy, which dominate Canada’s dividend-paying universe. That concentration is the trade-off for higher income.
The trailing 12-month dividend yield is about 3.55%, and most of the income comes from eligible Canadian dividends. Costs are low at a 0.22% expense ratio, which helps preserve income over time. For investors who want reliable, tax-efficient Canadian income with minimal complexity, VDY does the job neatly.
The iShares option
iShares S&P/TSX Composite High Dividend Index ETF (TSX: XEI) takes a slightly different approach but targets the same outcome.
XEI draws from the broader S&P/TSX Composite and selects higher-yielding dividend payers, resulting in a portfolio of about 75 companies. As expected, financials and energy play a major role, but the ETF also maintains exposure to utilities and telecommunications. One advantage is that it is not overly top-heavy, with its largest holdings each making up only a small percentage of the fund.
XEI also pays monthly distributions and currently offers a 4.38% 12-month trailing dividend yield. The management expense ratio is 0.22%, keeping it firmly within the low-cost threshold and competitive with VDY. Like VDY, most distributions are eligible Canadian dividends, which supports long-term tax efficiency.
