When it comes to dividend investing, I have a rough rule of thumb for what constitutes a reasonable yield before I’ve even examined a company’s payout ratio or financial statements.
For ordinary dividend-paying stocks in sectors such as financials, utilities, telecommunications, and energy, I’m generally comfortable looking at yields up to around 5%. For pass-through structures such as real estate investment trusts (REITs) and certain royalty trusts, where a larger portion of cash flow is distributed to investors, yields approaching 8% can sometimes be reasonable.
Anything significantly higher deserves closer scrutiny. Increasingly, exchange-traded funds (ETFs) advertising double-digit yields rely on covered call writing, leverage, or other strategies to supplement the income generated by their underlying investments. Those payments are distributions, and they aren’t necessarily supported entirely by ordinary corporate dividends.
For this exercise, I want to focus on what investors can realistically receive from conventional dividend-paying stocks and REITs. I’ll use two Canadian-listed ETFs as examples and assume we’re investing $100,000 in a Tax-Free Savings Account (TFSA).
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iShares S&P/TSX Composite High Dividend Index ETF
The first and broader option is the iShares S&P/TSX Composite High Dividend Index ETF (TSX: XEI).
XEI provides exposure to a diversified basket of Canadian dividend-paying companies, with substantial representation from financials and energy alongside sectors such as utilities, telecommunications, and real estate.
The fund charges a 0.22% management expense ratio (MER) and currently has a 3.5% trailing 12-month distribution yield. It pays monthly, making it convenient for investors who want regular cash flow.
At its October 14 closing net asset value (NAV) of $39.71, a $100,000 investment would purchase 2,518 whole shares, costing $99,989.78 and leaving $10.22 in cash. The most recent monthly distribution was $0.11 per share.
Assuming that payment remains constant, here’s what the income would look like:
Monthly income: $287.05
Annual income: $3,444.62
That’s approximately $3,445 in annual passive income, or around $287 per month, without needing to sell any shares.
Notice that this forward-looking estimate is slightly lower than what XEI’s 3.5% trailing yield might suggest. That’s because the trailing yield reflects distributions paid over the previous 12 months, whereas our calculation assumes the latest monthly payment continues unchanged. The actual amount will fluctuate as the underlying companies adjust their dividends and the ETF changes its distributions.
iShares S&P/TSX Capped REIT Index ETF
For investors willing to accept more exposure to real estate, the iShares S&P/TSX Capped REIT Index ETF (TSX: XRE) yields more.
XRE tracks an index of Canadian publicly traded REITs, giving investors exposure to income-producing properties across segments such as residential, retail, industrial, and commercial real estate.
REITs generally distribute a substantial portion of their cash flow to unitholders. XRE currently has a 4.7% trailing 12-month distribution yield, although its 0.60% MER is considerably higher than XEI’s.
Using its October 14 NAV of $15.47 as our purchase-price assumption, a $100,000 investment would buy 6,464 whole units, costing $99,990.08 and leaving $9.92 in cash. The actual execution price could differ from NAV.
The most recent September distribution was $0.06 per unit. Assuming that payment continues unchanged, the income works out to:
Monthly income: $368.45
Annual income: $4,421.38
That’s roughly $4,421 annually, or $368 per month, from the same initial investment.
Once again, the forward-looking income estimate differs from the trailing yield because we’re annualizing a single recent distribution rather than using the total amount paid over the previous year.
It’s also worth remembering that REIT distributions can include different tax components, including income, capital gains, and return of capital. Inside a TFSA, those distinctions generally don’t affect your Canadian tax bill.
Finally, I wouldn’t automatically choose XRE over XEI simply because it generates more monthly cash. REITs are sensitive to interest rates, financing costs, property valuations, and occupancy levels. Concentrating an entire $100,000 portfolio in Canadian real estate would also introduce substantial sector-specific risk.
