When you’re looking for income ETFs, it can pay dividends to think longer term. Undoubtedly, some of the high-yield or specialty income ETFs out there pay generous sums each and every month, such that selling them wouldn’t make all too much sense, especially for an investor who’s looking to have their portfolio cover a greater chunk of their living expenses. Indeed, when it comes to income ETFs, there’s more to look for than just the upfront yield, especially if you’re in it for the next decade or more rather than just the next few years.
Despite the growing number of complex, higher-fee products that have gone live on the TSX, I do think that the simple, old-fashioned, low-fee income solutions still stand out. In terms of ETF investing, I’m in the camp that thinks it’s best to keep structures simpler (that means index ETFs) and fees lower.
While a more-active approach that utilizes more sophisticated options-writing techniques might make sense for some people, especially those looking to stretch their yield as far as it can go, even at the expense of capital gains potential in a bull market, I do think that, for the most part, you cannot go wrong with simplicity and efficiency.
In this piece, we’ll look at one simple income ETF with a low fee, a respectable yield, a hotter streak than the rest of the market, and, perhaps more importantly, the potential to grow the payout over time.
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Vanguard FTSE Canadian High Dividend Yield Index ETF
The Vanguard FTSE Canadian High Dividend Yield Index ETF (TSX: VDY) is a simple, low-cost (though not as low as a vanilla TSX Index ETF) way to bet on the Canadian market with a heavy tilt towards larger-cap dividend payers with above-average yields. It’s no mystery that such criteria favours the Big Six Canadian banks. And the VDY has a huge helping to the names.
Beyond the banks, which dominate the top holdings, there’s also considerable exposure to mature, dividend-rich energy companies.
It’s a good mix of established energy producers and, of course, the cash flow-heavy pipelines. You can’t have a Canadian yield-heavy fund without the midstream giants! So, if you’re actively trying to get more exposure to these higher-yielding, and still cheap-looking, corners of the Canadian market, I’d argue that VDY is a very efficient way to go.
It’s almost like a bank and energy sector ETF with some insurers, utilities, and telecoms sprinkled on top. Of course, there’s a small dose of consumer and material names, but, for the most part, energy and financials are the greatest source of yield and dividend growth.
The yield sits at 3.5%, which is decent, but not as large as it used to be, and that’s thanks to the market-crushing appreciation enjoyed in the past year. The VDY has topped the TSX Index and the S&P 500 in the past full year, thanks in part to the red-hot banks and the scorching energy juggernauts.
The VDY has earned all five stars
I don’t like chasing ETFs or stocks based on past performance. But I do think that the mix of the ETF (the stock holdings and weightings) is terrific for long-term dividend (growth) investors. Add the five-star Morningstar rating into the equation, which goes beyond just past performance, and I think there’s a very strong case for income investors to stash the VDY on their watchlists, even at all-time highs.
In short, you’re getting more than just bigger dividends. You’re getting more exposure to the biggest cash cows in Canada and less exposure to the low-to-no-yield growth names that would make more sense for a balanced portfolio than one laser-focused on income.
Dare I say this dividend ETF might even appeal to more than just income-focused investors?
