Which Canadian Dividend ETFs Pay the Most?

Before comparing high-yield exchange-traded funds (ETFs), I want to make one distinction clear: a distribution is not necessarily a dividend. A dividend is cash paid by an underlying company from its earnings or cash flow. An ETF distribution can contain several different things, including dividends, interest, realized capital gains, option premiums, and return of capital.

That distinction becomes important when screening for the highest-yielding ETFs. According to the TMX ETF screener, there are 1,778 products to choose from, including some showing distribution yields north of 100%. That is not a free lunch. If anything, I consider yields that high a warning flag.

Many of these products are leveraged or covered call ETFs built around extremely volatile individual stocks. Their enormous distributions are partly generated through derivatives, and receiving a huge payout does not mean you’ll outperform simply owning the underlying stock. Principal can decline substantially along the way.

I wouldn’t even classify many of these as traditional dividend ETFs. They’re derivative-income strategies, and while some investors may find them useful, I generally stay away from ETFs advertising yields north of 12%.

If you’re looking for something closer to a conventional Canadian dividend ETF, the comparison becomes more useful after narrowing the screener to Canadian equities and non-leveraged and non-option based strategies. Among the higher-yielding options I found, one currently stands out with a 6.4% distribution yield: the Middlefield Real Estate Dividend ETF (TSX:MREL).

Keep in mind that this figure is an annualized distribution yield. Essentially, it takes the fund’s most recent distribution, annualizes it, and compares that amount with its current net asset value (NAV). It’s a useful snapshot of the current payout rate, but it isn’t a guaranteed return or necessarily what investors will receive over the next 12 months. Here’s what you need to know.

What is MREL?

MREL is an actively managed real estate ETF, meaning it doesn’t simply track an index and mechanically own whatever securities that benchmark includes. Instead, the portfolio is managed by Dean Orrico, president and chief investment officer of Middlefield, giving the fund flexibility to select opportunities across the real estate market.

That produces a portfolio quite different from many Canadian real estate investment trust (REIT) ETFs. Approximately 72% of the portfolio is currently invested in Canada and another 26% in the United States. Retail represents roughly 21% of the portfolio, followed by multifamily residential at 18% and industrial real estate at 15%.

More interestingly, healthcare represents about 13%, while data centres account for another 6%. Those latter two segments are difficult to access through the relatively limited Canadian REIT market, so the U.S. allocation provides some useful diversification.

Active management costs more and does not guarantee better results, but in this case Middlefield’s approach has produced a differentiated real estate portfolio rather than another version of the Canadian REIT index.

What about the 6.4% yield?

MREL currently pays a monthly distribution of $0.08 per share. Importantly, this is a managed distribution policy. The cash investors receive does not necessarily consist entirely of dividends generated by the underlying REITs.

Depending on the year, distributions can also include realized capital gains and return of capital. That allows the fund to provide a smoother monthly payout even when the income generated by its holdings fluctuates.

Investors should therefore focus on total return rather than assuming the 6.4% distribution represents investment income earned on top of changes in the ETF’s share price.

So far, the total-return record has been solid. Middlefield reports that MREL compounded at 12.9% annualized over the trailing three years with distributions reinvested and before taxes. Sometimes active management can add value, and MREL’s recent record makes a reasonable case for it. Still, this is a specialized real estate portfolio rather than something I would use as a core holding.

REIT distributions can also have complicated tax characteristics, potentially including ordinary income, capital gains, foreign income, dividends, and return of capital. For that reason, I would generally prefer holding MREL inside a Tax-Free Savings Account (TFSA) and treating it as a smaller satellite allocation within a more diversified portfolio.