Dividend ETFs – A true time-tested income strategy for investors

Canadians hungry for dividend income have a multitude of options in the Canadian market and these have proven popular representing about $42 billion and 5.4% of total ETF assets¹. Dividend portfolios can help generate income and provide ballast during rocky market periods. This includes passive funds, fully active mandates and covered call options.

While any of these strategies can generate yield, whether natural or engineered, traditional dividend ETFs provide a structurally sound exposure with strong total return outcomes over the long term.

Dividend-focused ETFs have evolved to represent a sturdy backbone for client portfolios that have historically shown resilience across many market environments. They can also provide stability in uncertain and inflationary environments through reliable cash flows which can partially offset inflation. The companies included in these portfolios tend to be more defensive during periods of market volatility, supported by steady earnings and stronger balance sheets.

There is a simple yet effective approach utilizing Vanguard’s suite of high-dividend ETF products. Here we take a look at two different approaches, high dividend yield versus dividend growers.

High dividend yield ETFs

This approach is best suited for investors looking for more immediate income including retirees drawing from their portfolios or those supplementing current cash flow. The higher starting yield provides more immediate income as the portfolio invests in mature, stable and value-oriented companies including a higher allocation to the energy, utilities and financial sectors.

Companies in these portfolios feature a high level of current income, forecasted to have above-average dividend yield over the next 12 months, with high-quality balance sheets and a dividend stream that can be resilient during market downturns.

VDY Vanguard FTSE Canadian High Dividend Yield ETF – Tracks market cap-weighted index that is focused on Canadian companies characterized by high dividend yield with an MER of 0.22%.

VIDY Vanguard FTSE Developed ex North America High Dividend Yield Index ETF – Tracks market cap-weighed index that aims to capture the performance of companies characterized by high-dividend yield and located in developed markets excluding the U.S. and Canada with an MER of 0.32%.

(NEW) VUDV Vanguard U.S. High Dividend Yield Index ETF - Tracks market cap-weighted index that is focused on U.S. companies that are characterized by higher-than-average dividend yields with a management fee of 0.28%.

(NEW) VUDH Vanguard U.S. High Dividend Yield Index ETF (CAD-Hedged) – Tracks market cap-weighted index that is focused on common stocks of U.S. companies that are characterized by higher-than-average dividend yields, hedged to Canadian dollars, with a management fee of 0.28%.

Dividend growth ETFs

These are designed for investors with a longer time horizon who want to prioritize total return and a rising income stream over time. The lower starting yield is offset by dividend growth that compounds over time. These portfolios are generally broadly diversified across sectors, style neutral and invest in financially disciplined companies that can grow earnings and dividends.

Companies in these portfolios tend to have a higher price-to-earnings ratio and growth rate, consistent income stream across market cycle and showcase an ability to grow their dividend over time. Stocks in these ETFs are often chosen based on raising dividends for a minimum of 10 consecutive years.

VGG Vanguard U.S. Dividend Appreciation Index ETF – Invests in U.S. companies across different market cap segments that have 10 years of consecutive dividend growth with an MER of 0.31%.

VGH Vanguard U.S. Dividend Appreciation Index ETF (CAD-hedged) – Invests in U.S. companies across different market cap segments that have 10 years of consecutive dividend growth, hedged to Canadian dollars, with an MER of 0.31%.

(New) VIGG Vanguard Developed ex-North America Dividend Appreciation ETF – Tracks market cap-weighted index that is focused on companies located in developed markets excluding Canada and the U.S., with a history of increasing dividends over time with a management fee of 0.28%.

These ETFs can all combine to provide a globally diversified suite of dividend products to suit the needs of any investor looking for yield.

Time-tested methodology, cost and diversification with dividend ETFs

Employing a time-tested methodology, with low-costs and broad diversification are three important considerations when examining a strong dividend investing strategy.

 As investors make considerations to build out dividend exposures in their portfolios, we continue to see the value in diversifying across Canada, the U.S. and International solutions. These two time-tested approaches offer greater choice in the type of dividend return investors can select, whether that is a portfolio geared towards high dividend yield or growth, or a combination of the two.

It’s a winning strategy that has stood the test of time.

_{¹ According to data from the Securities and Investment Management Association of Canada}

^Disclaimer

^{Commissions, management fees, and expenses all may be associated with investment funds. Investment objectives, risks, fees, expenses, and other important information are contained in the prospectus; please read it before investing. Investment funds are not guaranteed, their values change frequently, and past performance may not be repeated. Vanguard funds are managed by Vanguard Investments Canada Inc. and are available across Canada through registered dealers.}

^{This material is for informational purposes only. This material is not intended to be relied upon as research, investment, or tax advice and is not an implied or express recommendation, offer or solicitation to buy or sell any security or to adopt any particular investment or portfolio strategy. Any views and opinions expressed do not take into account the particular investment objectives, needs, restrictions and circumstances of a specific investor and, thus, should not be used as the basis of any specific investment recommendation. Investors should consult a financial and/or tax advisor for financial and/or tax information applicable to their specific situation.}

^{All investment funds, including those that seek to track an index are subject to risk, including the possible loss of principal. Diversification does not ensure a profit or protect against a loss in a declining market. While the Vanguard ETFs are designed to be as diversified as the original indices they seek to track and can provide greater diversification than an individual investor may achieve independently, any given ETF may not be a diversified investment.}

^{All monetary figures are expressed in Canadian dollars unless otherwise noted.}

This article was produced in partnership with Vanguard Investments Canada