5 Dividend ETFs I'd Never Buy

Even though I’m an active investor who really enjoys selecting stocks, reading up on businesses I don’t understand, and thinking about the art of portfolio construction, I still think a simple portfolio of ETFs is the ticket for most investors.

These are folks who understand they need to put money away for their retirement, but just don’t know where to start. Simplicity is key for them; they need a plan they can stick to over the long-term.

But there are a few problems with an ETFs and chill portfolio. One is how we tend to overcomplicate the whole plan. Simplicity goes out the window as we do our best to optimize everything. It leads to switching strategies every few years, portfolio overlap, and the very complexity we wanted to avoid in the first place.

Such a strategy can be harder than it looks, too. There are more than a thousand ETFs on the Toronto Stock Exchange. How does one choose a simple strategy when the first step is wading through a bunch of junk to get there? It might be easy for folks with finance experience to cut through the proverbial noise and find the good ones, but their clueless peers are going to struggle.

They end up throwing up their hands and going to an advisor, which costs them tens or even hundreds of thousands of dollars over their lifetimes in fees. No thanks.

Today we’re going to talk about some of these ETFs, but with with a couple of wrinkles. Because this is Canadian Dividend Investing, we’ll focus on ETFs that pay reasonable dividends. We’ll also start with the five I don’t like before pivoting back to ones I would buy. A couple of them don’t really seem like they’re dividend focused, but I’m going to argue that they’re actually dividend funds in disguise.

Let’s dive in.

Let’s start with my absolute least favourite ETFs, ones I hate with the passion of 1,000 burning suns. These are ETFs that hold shares of Canada’s top six bank stocks. They include:

These are the simplest ETFs on the planet. They own shares of Canada’s six largest banks, with ever-so-slightly different strategies to differentiate among each. RBNK, for instance, gives more emphasis on dividend yield. So it’ll overweight Canadian banks that have higher yields.

Y’all know I’m a big fan of Canadian banks. Collectively, Canada’s largest banks are my biggest position — and it isn’t even close, either. I think Canadian banking is a wonderful business, protected by what I think are a series of underrated moats. They’ve traditionally offered a succulent combination of yield and dividend growth. So many Canadians own them because they have generated so much wealth over the years.

The issue isn’t with owning Canadian banks. The problem is paying a fee to own six stocks. It makes zero sense to pay Royal Bank a 0.29% management fee to sort Canada’s six bank stocks by yield. I can easily do that myself for a 0.00% management fee. It would take about five minutes a quarter. I can do it as my wife watches Law & Order SVU, all while cracking jokes about how Olivia Benson is a terrible cop.

I have a bigger problem with ZEB or HEB. These bank ETFs rebalance their bank holdings every quarter, meaning they’re selling winners and buying the losers. I like the buying losers part, but strongly disagree with punting a winner from the portfolio simply to rebalance. Both also charge fees for the privilege of holding just six stocks, ranging from 0.19% for HEB to 0.28% for ZEB.

2023 was a fun time for Canadian dividend investors.

There were bargains aplenty on the TSX, and not just with traditional dividend stocks, either. Your author was gobbling up preferred shares that offered yields between 6.5% and 9%, quality companies that investors hated because interest rates were going up.

I took my time, sorted through all the noise, and gobbled up what I thought were some of the best ones. I locked in a 7%+ yield on Sagen MI Canada (TSX:MIC.PR.A) and an 8%+ yield on Brookfield Renewable’s preferred shares (I believe it was TSX:BRF.PR.C, but I might be wrong). There were more, too.

A year later each of these preferred shares were up 20%+, and that didn’t even include the dividend.

I condensed my thoughts on preferred shares into a tweet, which was inspired by me selling most of my preferred share portfolio.

I sometimes get asked about preferred shares as a way to goose a retiree’s income. I’m generally not a fan, since preferred shares have very limited upside. But, at the same time, I don’t hate the idea of doing so — provided they were purchased at an attractive price. I think the alpha is in picking and choosing the best issues, and then buying at the right time.

ETFs do neither of those things, and so they will underperform.

ETF fees also ensure investors will do worse than just buying the preferred shares outright. The largest preferred share ETF in Canada is the iShares Canadian Preferred Share Index ETF (TSX:CPD). It consistently underperforms its benchmark by about 0.5% each year… probably because it charges a 0.49% MER.

CPD offers a yield today of about 5%. Without that fee drag, investors would be getting a 5.5% payout. That 0.5% represents 10% of your income, which is a lot for an asset class that will never trade above par.

I’ve spent a lot of time thinking about REITs in the last few years, I think I’ve narrowed down what separates the good and not-so-good ones.

The error I — and so many others — made was getting too caught up in yield and value. The part of my brain that loves a deal won out, and so I ended up with a portfolio of REITs that offered succulent yields and which traded at a discount to net asset value.

I now realize quality matters. But how do you define quality? I narrow it down to the following:

Many of Canada’s top REITs realize local investors want yield, yield, and more yield, and will position themselves accordingly. They deliver huge distributions but earnings never grow because zero cash flow is reinvested back into the business. Any acquisitions are done using equity as the down payment, which is a problem when the equity offers a big dividend.

American REITs are more concerned with growth. They have reasonable payout ratios, better balance sheets, and managers want to grow earnings. Many offer yields in the 4-5% range, giving investors a nice mix of income and growth. I think that’s the sweet spot.

Canadian REIT ETFs don’t bother with my criteria. They simply buy based on the index, which puts too much emphasis on market cap and not enough on the qualities I like. Take the iShares Capped REIT Index ETF (TSX:XRE). Its top holdings are a mix of quality and meh. I’m not a fan.

This is another sector where large fees really make a difference. XRE yields about 4.1% as I write this. The management fee is 0.60%. You’re giving up 13% of your income so Blackrock can get paid. That’s so much!

There are thousands of U.S. dividend investors who simply buy the Schwab U.S. Dividend Equity ETF (NYSE:SCHD) and go to the beach.

They’re attracted to SCHD’s methodology — a value/quality mix that looks to buy dividend growers when they’re cheap and sell when they’re not as cheap — and its dirt-cheap management expense ratio of 0.06%. The attractive dividend yield (it’s 3.3% as I write this) and underlying dividend growth is also a winning combination. Total return is also excellent; SCHD has returned about 12% annually since its inception.

Why bother doing it yourself when you can outsource management for the low cost of 60 cents per $1,000 invested?

I only have one issue with SCHD, and that’s the selling process. The fund is much too quick to sell winners. It punted Microsoft in 2018 and Walmart in 2019, right before both made massive moves higher. It also sold Exxon Mobil in 2021, right before oil started its big bull run. I’d much rather hold those winners over the long-term instead of punting them to make room for something new.

Still, even after saying that, SCHD is a solid ETF. I wouldn’t fault anyone for owning it. It’s just not for me, that’s all.

Rather than going with a single ETF, I’m going to call out an entire category of products.

As I’ve said before, I’m no fan of the enhanced income ETFs. You know which ones, the funds that use covered calls and leverage to meet their yield targets. But I will give these funds credit for one thing; they at least offer some diversification.

There are single stock ETFs that do the same thing. They will often attach themselves to the riskiest and most volatile assets because they generate the highest option premiums. This allows the fund manager to offer a much higher “yield” than regular dividend investments.

Harvest has introduced what I think is the worst of the worst — an Enhanced High Income Shares ETF that follows Spacex. The initial payout on this is $0.30 per month on a stock that doesn’t even pay a dividend. The ETF trades for about $11.77 as I type this, giving us a “yield” of 31%.

To say I have some doubts about the sustainability of that payout is the understatement of the decade.

Okay, that’s enough negativity. Here are the three dividend ETFs I would buy if I were building my portfolio up that way.

First up is the one that seemingly every passive investor likes these days — the Vanguard All-Equity ETF Portfolio (TSX:VEQT). VEQT gives investors a one-step portfolio with exposure to the Canadian, American, and various worldwide markets. It’s a play on the world economy for only a 0.22% management fee.

VEQT doesn’t offer the biggest dividend yield, but it does have a history of growing its dividend. In 2021, VEQT paid a cash distribution of $0.514 per unit (along with $0.12775 in a “reinvestment distribution”). In 2025 that payout was $0.76 per share, approximately 50% higher. Total distributions went from $0.64 per share to a hair over $1 per share.

My view is VEQT is a dividend growth fund in disguise. Those dividends are going to keep marching higher most years because typically company profits increase.

Secondly, if I were looking for a dividend ETF in Canada, I would put my cash into the Vanguard Canadian High Dividend Yield Index ETF (TSX:VDY). It owns many of the same stocks I own, has a reasonable 0.22% management fee, and has delivered excellent total returns since inception. $10,000 invested when VDY became a thing is now worth about $50,000 — assuming all dividends were reinvested.

And finally, I’m going to go off the board a little bit. I think the BMO Low Volatility Canadian Equity ETF (TSX:ZLB) is quietly an excellent dividend growth ETF, although it doesn’t look like it. This is an ETF that owns the more boring part of the Canadian stock market. Top holdings include utilities, insurers, telecoms, and a healthy selection of Canada’s top grocers. It’s also a fairly concentrated portfolio; the top 10 holdings represent about 38% of total assets.

There are two reasons why I embraced a boring investing approach. Firstly, it works. Low volatility stocks outperform their sexier peers over the long-term for a few different reasons, including losing less during bear markets and because investors regularly overpay for hope. And secondly, I want less risk as I get older. I’ll leave the home run swings to the kids; I’m happy to go for singles and doubles at this point in my life.

ZLB (and its U.S. cousin, ZLU) have delivered solid returns, steadily increased their dividends, have reasonable management fees (a little high in the 0.3% range, but not bad), and are boring enough I don’t need to worry about the next bear market. ZLB is up a solid 10.85% annually over the last decade, and 12.7% annually since inception. Not bad.

There are a lot of ETFs out there. Some are great, offering a combination of reasonable management fees, good strategies, and solid long-term results. But most aren’t very good. They’re neutral at best to poor at worst.

An effective investing strategy is avoiding a lot of these problem products.

I listed five today that I don’t really like, but that list could easily be five hundred in North America. There are buttload of them out there.

My view is simplicity is best. If you’re motivated by dividends, stick to the big dividend ETFs. If you want global diversification with just one click, go for VEQT. Or if you’re looking for a boring portfolio of solid Canadian companies, then ZLB is the ticket.

Golf and tennis are games where minimizing mistakes matter. Investing is the same. Get the big things right, avoid making mistakes, and you’ll be well on your way. These are the things that are important. The rest is just details.