1 Top High-Yield Dividend ETF to Buy to Generate Passive Income

An ETF designed as a long-term foundational holding pays generous monthly dividends.

| More on:
exchange traded funds

Image source: Getty Images

Risk is inherent in any investment product, especially stocks. Various factors, not only supply and demand, cause price fluctuations, and they occur regularly, if not daily. Investors manage or contain volatility by choosing low-risk businesses or companies. However, picking individual stocks to build a portfolio is cumbersome and time-consuming.

Since the Toronto Stock Exchange introduced exchange-traded funds (ETFs) in March 1990, the ETF market has grown significantly. Today, even income-oriented investors skip the selection process. ETFs provide instant diversification because you can have a position in many stocks from various sectors in one basket.

If the objective is to generate passive income, consider the iShares S&P/TSX Composite High Dividend Index ETF (TSX:XEI). This ETF replicates the S&P/TSX Composite High Dividend Index’s performance (net of expenses). BlackRock Canada, the fund manager of various iShares Funds, seeks to deliver long-term capital growth. Moreover, XEI carries a “medium” risk rating.

Potential income

ETFs trade like stocks and are subject to market fluctuations. Canadian ETFs, including XEI, are qualified investments in a Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA). You hold units, the equivalent of shares.

As of January 13, 2025, XEI trades at $27.10 per unit. The ETF rewarded investors with a 15.4%-plus return in 2024 plus a generous dividend income. If you invest today, the dividend offer is 10.6%. None of the stock holdings can match the over-the-top yield. Moreover, the payout frequency is monthly.

Assuming you use your $7,000 TFSA limit in 2024 to purchase XEI (around 258 units), the money would transform into $61.64 in monthly passive income. For the RRSP, an investment equivalent to the maximum contribution room for the tax year 2024, or $31,560 (1,164.5 units), converts into $278.74 every month.

TFSA or RRSP balances can grow faster by dividend reinvesting, via the power of compounding. Money growth in both investment accounts is tax-free.  

Stockholdings

XEI has 75 stockholdings, all dividend payers. The TFS has exposure to 10 of 11 TSX primary sectors. Only information technology has zero exposure, as very few high-growth firms pay dividends. The top four sectors with double-digit percentage weights are energy (31.2%), financial (29.5%), utilities (13.5%), and communication (10.1%.

Among the top 10 holdings are oil bellwethers, Suncor Energy, Canadian Natural Resources, Enbridge, and TC Energy. In the financial sector, you have the Big Six Canadian banks, led by the Toronto Dominion Bank. Nutrien, the large-cap agriculture stock, completes the cast.

XEI also holds TSX’s two dividend kings, Canadian Utilities and Fortis, along with telco giants BCE, TELUS, and Rogers Communications. There’s also exposure to top-tier mining stocks like B2Gold and Granite REIT in the real estate sector.  

How long would it take you to review each stock if you were to do it yourself? BlackRock has done the legwork for investors.

Foundational holding

BlackRock created XEI in April 2021 and said it designed the high-yield ETF as a long-term foundational holding. The main advantage for risk-averse and income investors is greater diversity and ultra-generous monthly dividends.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool recommends B2Gold, Canadian Natural Resources, Enbridge, Granite Real Estate Investment Trust, Nutrien, Rogers Communications, and TELUS. The Motley Fool has a disclosure policy.

More on Dividend Stocks

Canadian Dollars bills
Dividend Stocks

Invest $10,000 in This Dividend Stock for $2,430.12 in Passive Income

This dividend stock has proven time and again it's a safe, reliable stock that still has the power to explode…

Read more »

A worker drinks out of a mug in an office.
Dividend Stocks

3 Canadian Dividend Stocks to Consider Adding to Your TFSA in 2025

If you're looking for long-term, undervalued dividend stocks to pick up in your TFSA, consider these first.

Read more »

Canadian dollars are printed
Dividend Stocks

Build a Cash-Gushing Passive-Income Portfolio With Just $25,000

An investment of $25,000 in these high-yield Canadian dividend stocks can help you earn $1,955 in tax-free passive income.

Read more »

dividends grow over time
Dividend Stocks

These Are the Top 4 Undervalued Stocks to Buy Right Now

These four undervalued stocks offer a change to get in on great value long term, with promising futures ahead.

Read more »

stock research, analyze data
Dividend Stocks

Where Will Canadian Tire Stock Be in 5 Years?

With Canadian Tire stock still trading roughly 20% off its all-time high, is it one of the best investments you…

Read more »

a man relaxes with his feet on a pile of books
Dividend Stocks

1 Superb Canadian Dividend Stock Down 17% to Buy in Bulk

This dividend stock is a standout option.

Read more »

The sun sets behind a power source
Dividend Stocks

Should You Buy Fortis While it’s Below $60?

Fortis is off the 12-month high. Is it time to buy?

Read more »

worker holds seedling in soybean field
Dividend Stocks

Is Nutrien Stock a Buy for Its 4.2% Dividend Yield

Nutrien stock is bouncing back with a 13% gain in 2025. With rising crop prices and a solid 4.2% dividend…

Read more »