Dividends for Canadian ETFs: How They Work and What to Expect

Many investors pursue stocks for capital growth—buying low and selling high to realize gains. Equally important for many is generating steady income through dividends. Dividend-focused strategies can complement growth-oriented investing by providing cash flow and potential long-term total return.

What are ETF dividends?

Dividends represent a company’s distribution of profits to its shareholders, most commonly paid on a quarterly basis. The dividend yield, a key metric for income investors, is calculated by dividing the annual dividend per share by the share price. Canada’s public markets include numerous companies known for attractive dividend yields.

Picking and managing individual dividend-paying stocks can demand time and research. Exchange-traded funds (ETFs) that focus on dividends offer a convenient alternative: they provide a diversified basket of dividend-paying companies, simplified management and built-in rebalancing. For example, the Fidelity Canadian High Dividend ETF (FCCD) held 65 dividend-paying stocks as of Jan. 15, 2024. There are many dividend ETF types, including funds focused on Canadian, U.S. or international high-dividend stocks; examples include Fidelity’s U.S. High Dividend ETF and its International High Dividend ETF.

How do dividends work in Canada?

Paying dividends is optional—companies decide whether and how much to distribute based on profitability, cash flow and future investment needs. Firms that can sustain and increase dividends over time are often viewed favorably by income-oriented investors because steady or growing payouts suggest financial strength.

To receive a dividend, an investor must hold the shares before the “ex-dividend date,” which is the first trading day on which new buyers are not entitled to the upcoming dividend. The company compiles the list of eligible shareholders on the “record date,” typically the business day after the ex-dividend date. Dividends are paid per share, so the total amount a shareholder receives equals the per-share dividend multiplied by the number of shares owned. For example, a 10-cent-per-share dividend on 100 shares equals $10 in dividends.

For ETFs, the fund itself receives dividends on the underlying holdings. After paying fund expenses, the ETF manager either distributes net dividends to unitholders or reinvests them within the fund. Many investors seeking compounding choose a dividend reinvestment plan (DRIP), where distributions automatically buy additional ETF units at market prices. For instance, FCCD distributes dividends monthly and offers investors the option to enroll in a DRIP to reinvest those distributions automatically.

When do dividend hikes, cuts and pauses happen?

Changes to a company’s dividend policy often send signals to the market about its financial condition and priorities. Investors typically interpret dividend actions as follows:

• Dividend hikes: An increase in the payout can indicate stronger profits, better cash flow and management confidence about future earnings, making the stock potentially more attractive to income investors.
• Dividend cuts: A reduction in dividends may suggest weaker profits or constrained cash flow and can lead investors to reassess the company’s outlook.
• Dividend pauses: Temporarily suspending payments can reflect a short-term cash-flow challenge or a strategic move to conserve capital for significant investments or restructuring.

If you invest in an actively managed dividend ETF, the fund manager monitors individual companies and makes portfolio decisions—so ETF investors do not need to track each company’s dividend events directly.

How are dividends taxed in Canada?

Dividends held in registered accounts such as a tax-free savings account (TFSA) or a registered retirement savings plan (RRSP) are not taxable while they remain inside those accounts. For foreign stocks or Canadian ETFs that hold foreign equities, withholding taxes may apply at source.

In non-registered accounts, dividends from Canadian public companies receive favorable tax treatment compared with interest. Because companies distribute dividends from after-tax profits, Canadian tax rules apply a gross-up to approximate pre-tax corporate income and then provide a dividend tax credit to reduce the investor’s personal tax burden. The simple example below illustrates the mechanics for an investor in a 30% marginal tax bracket:

Dividend income	Gross-up percentage	After gross-up	Marginal tax rate	Tax owing	Tax credit rate	Dividend tax credit	Net tax payable
$100	38%	$138	30%	$41.40	15.02%	$20.73	$20.67

The example assumes a 30% marginal tax rate; actual tax owed will vary with income level. At lower incomes, Canadian eligible dividends can result in little or no tax after credits. Note that the dividend tax credit applies only to dividends from Canadian corporations; dividends from foreign public companies are taxed as ordinary income at the investor’s marginal tax rate.

Distributions from Canadian ETFs are taxed in the same manner when the underlying income qualifies as Canadian eligible dividends. Income attributable to foreign holdings is typically taxed as ordinary income, and foreign withholding taxes paid may be claimed as a foreign tax credit against Canadian tax owing. For example, an investor might receive an $85 cash distribution after a $15 withholding tax; the taxable amount could be $100 while the $15 foreign tax is available as a credit in the investor’s foreign tax credit calculation.

How to buy Fidelity’s dividend-focused ETFs

There are two common ways to purchase Fidelity’s dividend-focused ETFs:

• Through a financial advisor: An advisor can help determine whether dividend ETFs fit your overall portfolio, recommend specific funds and advise on allocation based on your goals and risk tolerance.
• Via an online brokerage: Fidelity’s ETFs are available through most Canadian online brokerages. Log in to your brokerage account and search for the ETF by its ticker symbol, just as you would for a stock.

Because many Canadian stocks offer attractive yields and because of the dividend tax credit, dividend-focused investing can be especially appealing for investors seeking income in taxable accounts. If you have a long-term horizon and can tolerate market volatility, a dividend-focused ETF may be a suitable component of your portfolio.

Read more about investing:

• How many ETFs can Canadian investors own?
• Taking an active approach to ETF investing in Canada
• What investments can I put in my TFSA?
• Building a “core and explore” portfolio with an all-in-one ETF
• Five ways to worry less about your investments with an all-in-one ETF