Are you looking for a quality dividend ETF to invest in?
If so, you’ve got quite a universe of ETFs to choose from! Among others, you have choices like:
- Canadian ETFs.
- U.S. ETFs.
- Foreign ETFs.
- Sector ETFs.
- And more.
The options are many!
Thankfully, it’s not that hard to get an above-average amount of income coming into your portfolio with only a modest sum invested in dividend ETFs. In this article, I will explore a dividend ETF that could get you started on your journey to passive income with as little as $500 invested.
Vanguard’s Canadian high-yield ETF
The Vanguard FTSE Canadian High Dividend Yield Index ETF (TSX:VDY) is, as the name implies, an ETF made up of high-yield Canadian stocks. It has approximately a 3.9% dividend yield, which means that if you invest $500 in it, you get about $20 back in passive income per year.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| VDY | $49.64 | 10 | $0.16 per share per month ($1.92 per year) | $1.60 per month ($19.20 per year) | Monthly |
Now, reading the above, you might be thinking “$20? Are you kidding me here?”
It’s true: your income starting with just $500 is going to be pretty minimal. But the beautiful thing about ETFs and other public equity investments is that you can add to them over time. Unlike private businesses, you don’t have to negotiate a transaction and buy your whole lot right there on the spot. You can buy a little more with each paycheque, and build up your position over time. So, assuming that you make regular contributions, VDY’s price and dividend never change, and you get your $500 position up to $5,000, then you’re getting $200 per year. At $50,000, $2,000 per year. And so on and so forth.
Now, this is all simplifying a little because prices and dividends do change. ETF prices go up and down frequently, and dividends mostly trend upward over time but sometimes (e.g., in recessions) get cut. So we need to look at the characteristics of VDY to make sure it’s really worth the investment.
Ample diversification
One quality VDY has that points to the possibility of adequate future returns is diversification. Basically, the more diversified an investment, the lower its risk. Very diversified investments often deliver adequate returns. For this reason, a diversified portfolio is ideal for most investors.
The VDY ETF scores pretty highly on diversification. It has 56 holdings, which is enough to spread out the risk in each holding quite a bit. Also, the holdings are in different sectors, so the assets aren’t too closely correlated with one another. So VDY’s diversification benefit is considerable.
Low fees
Another thing that VDY has going for it is low fees. The fund’s management expense ratio is just 0.22%. That’s higher than true broad market index funds, but lower than most actively managed ETFs. Put simply, the fund is not very costly.
Foolish takeaway
As we’ve seen, it doesn’t take a whole lot of money to get some passive income coming in each year. All it takes is $500 to get your first $20 per year income stream started. If you add to that investment over time, you can eventually get to a point where you’re getting thousands per year in dividends alone.
