XEQT vs Canadian Dividend ETFs: Why Total Return Beats Yield Chasing

If you spend any time on Canadian personal finance forums, you already know: Canadians are absolutely obsessed with dividends. Every other post on Reddit’s r/PersonalFinanceCanada is someone asking about “the best dividend stocks” or showing off their monthly dividend income screenshots.

I get it. I used to be one of those people. There is something deeply satisfying about seeing cash land in your account every quarter. It feels like your money is doing something. But after years of investing and a lot of spreadsheet therapy, I realized that my love affair with dividends was actually costing me money.

Today, I want to break down exactly how XEQT (iShares Core Equity ETF Portfolio) stacks up against Canada’s most popular dividend ETFs – XEI, VDY, and ZDV – and why total return investing beats yield chasing for the vast majority of Canadian investors.

1. Why Canadians Love Dividends (The “Dividend Myth”)

Let me paint a picture you have probably seen before. Someone on a finance forum posts: “I just hit $500/month in passive dividend income!” and the comments go wild. Hundreds of upvotes. Congratulatory messages. Screenshots of DRIP schedules.

Meanwhile, someone posting “My diversified index portfolio grew by $40,000 this year” gets a fraction of the engagement.

Why are Canadians so dividend-obsessed? A few reasons:

• It feels like “free money.” Getting a deposit every quarter triggers the same reward centres in your brain as finding a $20 bill on the sidewalk. It feels tangible in a way that unrealized capital gains never do.
• The Canadian dividend tax credit. Canada offers a generous tax credit for eligible Canadian dividends, which makes people think dividends are always tax-efficient. (Spoiler: it is more nuanced than that.)
• Bank stock culture. We grow up hearing stories about grandparents who bought Royal Bank shares in the 1970s and lived off the dividends. It is baked into Canadian investing DNA.
• Fear of selling. Many investors psychologically cannot bring themselves to sell shares for income. Dividends feel like you are getting paid without “losing” anything.

Here is the thing though: a dividend is not free money. When a company pays a $1 dividend, the stock price drops by roughly $1 on the ex-dividend date. You are literally getting your own money back. It is like moving money from your left pocket to your right pocket and celebrating because your right pocket is heavier.

This is what I call the “dividend myth” – the belief that dividend income is somehow superior to or separate from total return. It is not. And once you understand this, the case for XEQT over dedicated dividend ETFs becomes very clear.

2. Head-to-Head: XEQT vs XEI vs VDY vs ZDV

Let’s put the numbers on the table. Here is how XEQT compares to Canada’s three most popular dividend ETFs.

The Basics

Right away, a few things jump out. XEQT holds over 9,000 stocks across the entire globe, while the dividend ETFs are concentrated in roughly 50-75 Canadian companies. That is a massive difference in diversification.

Sector Concentration

This is where things get really interesting – and a little scary if you hold dividend ETFs.

Look at those financials numbers. VDY has over half of its entire portfolio in Canadian bank and insurance stocks. XEI and ZDV are not much better at 35-45%. If the Canadian financial sector has a rough stretch – and it has happened before – your “safe” dividend portfolio takes a disproportionate hit.

Meanwhile, XEQT spreads your money across every major sector and geography on earth. Technology, healthcare, consumer goods, industrials – you name it, you own it.

5-Year Performance (Total Return)

Here is the metric that actually matters – total return, meaning price growth plus dividends reinvested.

Even with their higher yields, the dividend ETFs have generally underperformed XEQT on total return over the past five years. And here is the kicker: XEQT also had a smaller maximum drawdown, meaning it was less volatile despite being a 100% equity fund with global exposure.

That gap of $700 to $1,200 on a $10,000 investment might not sound huge, but compound it over 20 or 30 years and you are looking at tens of thousands of dollars in lost wealth.

3. Total Return vs Dividend Yield – Why Total Return Is What Matters

I want to hammer this point home because it is the single most important concept in this entire article.

Total return = price appreciation + dividends

When you focus only on dividend yield, you are looking at just one piece of the puzzle. A stock that pays a 5% dividend but drops 3% in price gave you a 2% total return. A stock that pays a 1% dividend but grows 12% in price gave you a 13% total return.

Which investor is actually wealthier at the end of the year?

Here is a simple thought experiment:

• Portfolio A (Dividend ETF): $100,000 invested, 4.5% yield, 5% price growth = $109,500 total value
• Portfolio B (XEQT): $100,000 invested, 2.8% yield, 8% price growth = $110,800 total value

Portfolio B made you $1,300 more even though it paid a lower dividend. The person with Portfolio A might feel richer because they got bigger quarterly deposits, but they actually have less money.

I fell into this exact trap myself. Back when I was building a dividend portfolio, I would calculate my “yield on cost” and feel great. Meanwhile, my friend who just bought a total market index fund was quietly outperforming me by 2% a year. Over a decade, that added up to a painful difference.

The market does not care how your returns arrive. A dollar of capital gains is worth the same as a dollar of dividends (and in many cases, actually worth more after taxes – but we will get to that).

4. The Tax Inefficiency of Dividends in Non-Registered Accounts

This is where the “but Canadian dividends get the tax credit!” crowd needs to pay close attention.

Yes, eligible Canadian dividends receive preferential tax treatment through the dividend tax credit. But this does not mean dividends are always the most tax-efficient way to build wealth. Here is why:

You do not control when dividends hit your account. Every quarter, your dividend ETF forces a taxable event on you whether you want it or not. With a total return approach, unrealized capital gains sit in your portfolio and compound tax-free until you choose to sell.

Consider this comparison in a non-registered (taxable) account:

• Dividends: You receive $4,500 in eligible Canadian dividends. Even with the dividend tax credit, you owe tax on this income every single year.
• Capital gains: Your portfolio grows by $8,000 in unrealized gains. You owe $0 in tax this year because you have not sold anything. Those gains keep compounding.

This is called tax deferral, and it is one of the most powerful wealth-building tools available. Every year you defer taxes is another year that money is compounding for you instead of sitting in the government’s pocket.

Now, XEQT does pay dividends too – about 2.8% – so it is not completely tax-deferred. But that is significantly less forced annual taxation than the 4.5-5% coming from dividend ETFs.

In a TFSA or RRSP, this point is mostly irrelevant since investment growth is tax-sheltered. But for anyone investing in a non-registered account (and most serious investors eventually need to), the tax drag of high dividend payments adds up significantly over time.

One more nuance: XEQT holds US and international stocks, which pay foreign dividends. These do not qualify for the Canadian dividend tax credit. However, the proportion of XEQT’s distribution that comes from foreign dividends is smaller than the massive Canadian dividend payouts from XEI, VDY, and ZDV, and the total return advantage of global diversification more than compensates.

5. When Dividend ETFs Might Actually Make Sense

I want to be fair here. I am not saying dividend ETFs are always terrible. There are specific situations where they can serve a purpose:

• You are retired and need regular income. If you are drawing down your portfolio and the psychological comfort of receiving dividends without selling shares helps you sleep at night, there is real value in that. Behavioural finance matters.
• You have maxed out your TFSA and RRSP and want Canadian dividend income in a taxable account. The dividend tax credit does provide a meaningful benefit at lower income levels.
• You specifically want to overweight Canadian banks and energy. If you have a strong conviction that Canadian financials and energy will outperform the global market (a bold bet), a dividend ETF gives you that concentrated exposure.

But here is my honest take: even for retirees, a total return approach where you sell shares as needed (sometimes called a “homemade dividend”) is mathematically superior in most scenarios. You get to control the timing and amount of your income, optimize for taxes, and maintain better diversification.

The only real advantage of dividends in retirement is the psychological comfort of not having to sell. And if that comfort is what keeps you invested during downturns instead of panic-selling, it might be worth the slight drag on returns.

6. Why XEQT Gives You Dividends AND Growth

Here is something many investors overlook: XEQT already pays dividends.

With a yield of approximately 2.8%, XEQT delivers meaningful income. On a $100,000 portfolio, that is roughly $2,800 per year in distributions – not nothing. And because XEQT holds thousands of dividend-paying companies around the world (including those very same Canadian banks that populate XEI, VDY, and ZDV), you are already getting broad dividend exposure.

The difference is that XEQT does not sacrifice growth to chase yield. Here is what you get with XEQT that dividend ETFs cannot offer:

• Global technology exposure. Apple, Microsoft, Nvidia, Alphabet – these companies reinvest profits into growth rather than paying large dividends, and their stock prices have reflected that spectacularly.
• Emerging market growth. Companies in India, Brazil, Taiwan, and other developing economies that are growing rapidly.
• Healthcare and biotech. An entire sector that barely exists in Canadian dividend ETFs.
• Automatic rebalancing. XEQT rebalances across four underlying funds so you are always at your target global allocation without lifting a finger.

Think of it this way: dividend ETFs give you a slice of the Canadian economy. XEQT gives you the entire global economy. And the global economy, as a whole, has consistently grown faster than any single country’s dividend-paying stocks.

You get dividends and exposure to the highest-growth sectors and markets on Earth. Why settle for one when you can have both?

7. The Psychological Trap of Dividend Investing

I want to talk about something that does not show up in any comparison table: the psychology of dividend investing. Because this is, in my experience, the real reason people resist switching to a total return approach.

Dividends feel safe. When the market drops 20%, seeing those quarterly deposits land in your account provides emotional comfort. “At least I am still getting paid,” you tell yourself. Meanwhile, your capital is down just as much as it would be in an index fund – but the dividends create an illusion of stability.

Yield chasing escalates. I have watched this happen to friends and fellow investors. You start with solid Canadian bank ETFs. Then you find a 6% yielder. Then a 7% yielder. Before you know it, you are holding sketchy high-yield vehicles that are paying unsustainable distributions funded by return of capital. It is a slippery slope.

Dividend cuts feel personal. When a company cuts its dividend, it feels like a betrayal. Investors who built their retirement plan around dividend income from specific stocks or ETFs can see their income slashed through no fault of their own. In 2020, several major Canadian companies cut or suspended dividends during the pandemic. Investors who depended on that income were caught off guard.

Tracking yield on cost is misleading. This is a big one. Dividend investors love to calculate their “yield on cost” – the current dividend divided by their original purchase price. If you bought a stock at $20 that now pays a $2 dividend, your yield on cost is 10%. Sounds amazing, right? But it is meaningless. What matters is the current yield on the current market value compared to alternative investments. Yield on cost is just a feel-good metric that obscures whether you are actually making good investment decisions.

With XEQT, you sidestep all of these psychological traps. You are not watching individual companies for dividend announcements. You are not tempted to chase yield. You are not tracking yield on cost. You are simply owning the global market and letting compound growth do its thing.

8. The Final Verdict

Let’s be honest about what the numbers tell us:

XEQT wins for the vast majority of Canadian investors. Here is why:

• Better diversification: 9,000+ holdings across 40+ countries vs 50-75 Canadian stocks
• Lower concentration risk: No sector makes up more than ~22% of the portfolio, vs 55% financials in VDY
• Competitive or superior total returns: XEQT has matched or beaten dividend ETFs over most time periods
• Greater tax efficiency: Lower forced distributions in taxable accounts
• Lower MER: 0.20% vs 0.22-0.39% for dividend ETFs
• Simplicity: One fund, global exposure, automatic rebalancing
• Still pays dividends: ~2.8% yield means you are not giving up income entirely

Dividend ETFs (XEI, VDY, ZDV) might work if:

• You are already retired and depend on regular cash flow
• You have a strong conviction in the Canadian financial and energy sectors
• The psychological comfort of higher dividend deposits genuinely keeps you invested long-term

But for anyone in the accumulation phase – building wealth for retirement over 10, 20, or 30+ years – the math strongly favours XEQT and the total return approach.

I spent years chasing dividends before I figured this out. I was so focused on building that monthly income stream that I lost sight of what actually matters: growing my total wealth as efficiently as possible. The day I simplified everything into XEQT was the day my portfolio actually started performing the way I needed it to.

Your future self does not care whether your returns came from dividends or capital gains. They care about the total number at the bottom of the statement. And XEQT, with its low fees, global diversification, and total return focus, is built to maximize exactly that.

Related Reading

• Does XEQT Pay a Dividend?
• What to Do with XEQT Dividends: Reinvestment Strategies
• XEQT Tax Implications: Canadian Investors Guide
• Is XEQT a Good Investment?
• XEQT TFSA vs RRSP: Where Should You Hold It?
• XEQT Holdings: What You Actually Own
• XEQT for Beginners