Do you want the best Canadian dividend ETF investments to be part of your portfolio? We can teach you how to find them

We still think investors will profit most—and with the least risk—by buying shares of well-established, dividend-paying stocks with strong business prospects. A Canadian dividend ETF is a great way for investors to own a wide range of these stocks in a single investment. Canadian exchange traded funds are also eligible for the Canadian dividend tax credit, although this only applies to Canadian ETFs that pay dividends (and hold Canadian stocks).

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The best Canadian dividend ETF investments provide dividends and the best of both worlds

Investors get the broad market exposure of a traditional mutual fund, plus the ability to trade at will with nominal fees. The best ETFs represent a low-cost, tax-efficient way for investors to make money in the long term.

Investors can buy ETFs via stock exchanges on margin or sell them short. The best ETFs offer well diversified, tax-efficient portfolios with exceptionally low management fees. Investors big and small can use ETFs to build well-diversified portfolios.

ETFs have evolved, and competition has increased. Still, you need to be very selective with your ETF holdings.

The dividend tax credit offered to Canadians can greatly increase your investment returns

Canadian taxpayers who hold Canadian dividend stocks, like those in a Canadian dividend ETF, get a special bonus. Their dividends can be eligible for the dividend tax credit in Canada. This dividend tax credit—which is available on dividends paid on Canadian stocks held outside of an RRSP, RRIF or TFSA—will cut your effective tax rate.

This means that dividend income will be taxed at a lower rate than the same amount of interest income. Investors in the highest tax bracket pay tax of around 29% on dividends, compared to 50% on interest income. At the same time, investors in the highest tax bracket pay tax on capital gains at a rate of about 25%.

Look for Canadian dividend ETF investments with consistency

One of the best ways of picking a quality Canadian dividend stock is to look for companies that have been paying dividends for at least 5 to 10 years. Companies can trump up quarterly earnings, issue press releases to appear to be making strong progress, but they cannot fake dividends. Dividends are cash outlays that an unsuccessful company could never produce. A history of dividend payments is one commonality that all the best dividend stocks have.

Dividend stocks are a sign of investment quality. Some good companies reinvest profit instead of paying dividends. But fraudulent and failing companies hardly ever pay dividends. So if you only buy stocks that pay dividends, you’ll automatically stay out of almost all the market’s worst stocks.

8 ways to find the best Canadian dividend ETF

• Look for ETFs that hold companies with records of long-term success and a long history of paying dividends. These companies are the most likely to keep paying and increasing their dividends.
• The current financial health of each company in the ETF. If a company is doing well, has done so consistently, and shows signs of growth, these factors are indicative of stocks that will keep paying a dividend.
• How does the company manage its relationships with investors? If there is a favourable relationship, and the company fits the other qualifications listed above, it may be a good dividend-paying stock to invest in.
• Know the economic stability of countries when investing in international ETFs. It’s also worth mentioning that foreign leaders may not be your ally when it comes to passing legislation that can affect your investments.
• Know how broad the ETF is, so you can determine its volatility. The broader the ETF, the less volatility it may have. A sector-based ETF, like one that tracks resource stocks, may however be even volatile.
• Know the liquidity of ETFs you invest in.
• Consider buying ETFs in a lump sum rather than periodic small amounts to cut down on brokerage fees.

Canadian dividend ETF investing requires a long-term mindset

Investors should take a long-term view of investing when deciding on Canadian exchange traded funds. They are units you will likely want to hold on to for a long time. Buying and selling them too quickly will generally result in minimal capital gains.

How do you feel about Canadian dividend ETFs? Share your story with us in the comments.

This article was originally published in 2017 and is regularly updated.