If you’re investing for retirement, you might want to consider investing in exchange-traded funds (ETFs).
ETFs are diversified investment funds that hold a variety of stocks, similar to mutual funds. What makes ETFs different from traditional mutual funds is that they trade on the stock market, making them liquid and easy to buy and sell.
A particularly powerful form of ETF is the index ETF, an ETF that is also an index fund. Index funds track major stock market indexes, which results in them having lower fees than other funds. This fact, combined with index funds’ high level of diversification, results in such funds outperforming active funds and most individual investors over the long term.
Generally, index funds tend to pay dividends monthly. For investors with regular monthly living expenses, this fact can be inconvenient. Fortunately, there are some index funds out there that pay monthly dividends and have relatively high yields too! In this article, I’ll explore one Canadian monthly-pay ETF with a 2.8% dividend yield.
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Vanguard’s high yield Canada ETF
The Vanguard FTSE High Yield Canada ETF (TSX: VDY) is a Canadian fund offered by The Vanguard Group. The fund is built on the FTSE High Yield Canada Index, an index of 58 relatively high yielding Canadian stocks. This is not some ultra-high yield index that indiscriminately picks out every stock with a near double-digit yield, exposing investors to extreme risk. Instead, it picks from among relatively high-yielding TSX large cap stocks. Essentially it’s like the S&P/TSX 60 Index except with low/no dividend stocks screened out, resulting in a slightly higher yield than the broader markets.
Ample diversification
Compared to most other funds out there, VDY has an adequate amount of diversification. It holds 60 assets, of which 58 are the underlying index’s stocks, and two are cash equivalents. This is enough diversification to make VDY representative of the Canadian large cap high dividend universe. It is also enough to diversify away some of the risk in the fund’s individual stocks.
Sensible fees
VDY has a 0.22% management fee. This is not particularly high. There are many index funds out there that have lower fees – typically broad market funds. However North American broad market funds don’t even yield 2% these days. If immediate Canadian-sourced dividend income is what you’re after, 0.22% is not an unreasonable price to pay for it (funds tracking ‘niche’ or thematic indexes usually have higher fees than those that track broad markets).
Dividend potential
The VDY ETF has a 2.8% yield at today’s price (using the average trailing 12 month dividend as the presumed forward dividend). If you invest $50,000 in it, you’ll get about $1,420 in dividends per year, if my payout assumption holds. Here’s the math on that.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| Vanguard FTSE High Yield Canada Index ETF | $78.59 | 636 | $0.186 per month ($2.32 per year) | $118.30 per month ($1,420 per year) | Monthly |
Foolish takeaway
In the world of index investing, monthly income is rare, but isn’t impossible to find. With a monthly-pay dividend ETF like VDY, you can get substantial income coming in each and every month.
