There are a lot of monthly income exchange-traded funds (ETFs) in Canada right now. Some even go a step further and pay semi-monthly, meaning you get paid twice every 30 to 31 days. On the surface, that sounds great.
The trade-off is how those payouts are generated. Many of these newer income ETFs rely on financial engineering to boost yields into the double digits. That often includes leverage, covered call strategies, or more complex structures.
Those can work in certain environments, but they can also come with higher fees, capped upside, and more volatility when markets turn. If you want to keep things simple, there is a strong case for sticking with a low-cost, plain vanilla dividend ETF.
Here is one dividend ETF from iShares that pays monthly and, when held inside a Tax-Free Savings Account (TFSA), delivers income that is completely tax-free.
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What is XDIV?
The iShares Core MSCI Canadian Quality Dividend Index ETF (TSX: XDIV) is a passive rules-based dividend ETF that tracks the MSCI Canada High Dividend Yield 10% Security Cap Index, net of expenses.
The index applies a set of screens to select Canadian dividend-paying companies with strong financials, solid balance sheets, and more stable earnings. It also limits any single holding to a maximum weight of 10%, which helps prevent overconcentration in one name.
The result is a relatively focused portfolio of just 21 holdings. That is much narrower than a broad-market ETF, but that is by design. The fund is intentionally concentrated in higher-quality dividend payers.
Like most Canadian equity strategies, financials dominate the portfolio at 44.9%, followed by energy at 29.5%. Utilities come next at 12.2%, and consumer discretionary rounds out the top sectors at 11.4%.
Yield and expenses
There are two main ways to look at yield for XDIV. The first is the trailing 12-month yield. This looks at what the ETF actually paid out over the past year and compares it to the current price. Right now, that comes in at about 3.6%.
The second is the distribution yield. This takes the most recent monthly payout, annualizes it, and compares it to the current price. That figure is slightly higher at 3.6%, but keep in mind it is a projection.
In practice, both are useful. The trailing yield tells you what investors actually received, while the distribution yield gives you a forward-looking estimate. Averaging the two is a reasonable way to get a quick sense of expected income.
Just keep in mind that the payout is not fixed. Like most dividend ETFs, the monthly distribution can change over time depending on what the underlying companies pay.
Inside a TFSA, though, the tax treatment becomes irrelevant. You do not need to worry about whether the income is classified as eligible dividends, capital gains, return of capital, or anything else. The full amount is yours to either reinvest or withdraw.
On fees, this ETF stands out. With a 0.11% management expense ratio, XDIV is one of the lowest-cost dividend ETFs in Canada. On a $10,000 investment, that is about $11 per year in fees, which keeps more of the income in your pocket.
