One of the most pressing questions for those who are new to investing is whether to choose individual dividend stocks or dividend ETFs to invest in. Both can offer an opportunity to generate a regular income stream as well as provide some growth.
But which is better for your portfolio? Owning individual stocks requires understanding whether the businesses deserve your money and tracking how they perform. An ETF, on the other hand, handles the individual component holdings, but investors still need to understand what they own.
Let’s look at a case for both.
What individual dividend stocks offer
Buying an individual dividend stock gives investors control over which businesses enter their portfolio. That’s especially true if you like a company’s prospects and believe the dividend is affordable.
A great example of this is Canadian Natural Resources (TSX: CNQ). The company is one of the largest oil and gas producers with a portfolio of long-life slow-decline assets.
That gives investors exposure to the energy sector through a company that has paid quarterly dividends for decades.
In fact, Canadian Natural Resources has provided healthy increases to that dividend for 26 consecutive years. The most recent uptick was announced earlier this year, which was a 6.4% increase to $0.63 per share.
That’s the appeal of dividend growth. It can help build income without contributing additional money, provided that those future increases keep coming. The other advantage is that unlike an ETF, there’s no fund fee that comes with owning those shares.
The challenging part is owning a single company, even a strong company like Canadian Natural Resources leaves you exposed to how the business performs.
In the case of Canadian Natural Resources, lower commodity prices can pressure Canadian Natural’s cash flow, even when the company is otherwise doing well.
What a dividend ETF does for you
Dividend ETFs offer a way to own multiple dividend-paying businesses through one purchase. That can be an attractive option for a new investor contributing smaller amounts who still wants some diversification.
One example to consider is iShares S&P/TSX Composite High Dividend Index ETF (TSX: XEI). This fund includes 75 dividend payers from across the Canadian market. That includes representation from multiple sectors such as energy, financials, utilities, telecoms, real estate, materials and industrials, to name just a few.
The ETF provides investors with monthly distributions that, as of the time of writing, work out to a yield of 3.5%. A monthly distribution is an appealing option for investors looking for regular income that matches a monthly budget.
In terms of fees, XEI has an expense ratio of 0.22%, which works out to about $22 per year on a $10,000 investment. Fortunately, those expenses come out of the fund’s assets rather than arriving as a separate bill.
Dividend stocks or dividend ETFs: Where should beginners start?
Both dividend stocks and dividend ETFs offer income and growth potential for investors.
For investors who want dividend exposure while not wanting to follow company reports, a dividend ETF makes investing easier. It also provides a larger basket of companies to invest in, even when the amount contributed is smaller.
Individual stocks, on the other hand, suit investors who want greater control over their holdings. Canadian Natural is a great example of that from the energy sector. The portfolio could then be diversified by adding other holdings that will provide diversification to the entire portfolio.
Finally, there’s a case for using both. An investor could start with an ETF and then branch out into individual stocks over time.