You have surely seen those videos on social media: "The 5 Canadian ETFs paying more than 10% in dividends!" The numbers are real, the advertised yields are verifiable, and yet, for most investors building their wealth, these funds are the wrong tool. Not because they are bad in themselves, but because they are designed for a different life stage than yours.
Here is how to settle it, once and for all, between dividends and pure growth.
Two engines, two missions
A growth ETF (think technology index funds or the major U.S. indexes) pays little or no dividends. All the return comes from appreciation: companies reinvest their profits, their value rises, and your capital compounds silently, year after year.
A high-dividend ETF does the opposite: it pays you income now. The most popular funds of the moment, those advertising 10% to 13% yields, use a covered-call options strategy: they sell the upside potential of their stocks for a premium, which they redistribute to you every month.
Remember this line, it sums it all up: high dividends pay your present with your future.
The invisible price of big dividends
A 13% yield seems unbeatable. Here is what the label does not say.
The growth cap. By selling call options, the fund gives up the strong rises. When the market climbs 25%, a covered-call fund captures only a fraction. But markets rise in bursts: missing the best weeks costs a great deal over twenty years.
Return of capital. Part of the distributions of several of these funds is not return, it is your own money being handed back to you. The advertised yield remains technically accurate, but your capital erodes or stagnates.
Total return tells another story. Always compare the total return (growth plus reinvested distributions) rather than the distribution rate. Over ten years, the major growth indexes have historically dominated income-maximizing strategies, often by a considerable margin. The fund paying you 13% while its value treads water loses to the one that pays nothing but doubles.
The real question: are you accumulating or decumulating?
The choice between dividends and growth does not depend on your risk tolerance or the trend of the moment. It depends on one thing only: your stage.
In the accumulation phase — you work, you invest every month, your horizon exceeds ten years — you have no need for investment income. Every dollar of dividend paid is a dollar that stops compounding, and that you will have to reinvest yourself (with friction, delays, and sometimes tax). Pure growth is your engine: it compounds on its own, without intervention, without the temptation to spend the distributions.
In the decumulation phase — you live off your portfolio, retired or semi-retired — the logic reverses. You need regular income without selling your units at the wrong time. Dividend ETFs, including covered-call strategies, then become legitimate tools: the growth cap bothers you less, since income stability becomes the priority.
The rule fits in one line: growth to build, dividends to live on.
The tax angle, briefly
In Quebec, taxation reinforces this logic. In a TFSA, everything is sheltered, but every dollar of contribution room is precious: filling it with growth maximizes the shelter advantage over twenty years. In a non-registered account, distributions from covered-call funds are often a complex tax mix (ordinary income, capital gains, return of capital) less advantageous than the deferred capital gain of a growth fund you do not sell. And dividends from foreign companies do not benefit from the Canadian dividend tax credit.
In other words: even tax votes for growth during accumulation.
The psychological trap of monthly income
It must be named, because it is the real salesperson of these funds: receiving a deposit every month provides an immediate satisfaction that silent growth will never give. It is positive reinforcement, and it is exactly why these products are so popular on social media.
But your portfolio does not need to entertain you. It needs to compound. Pure growth is boring for twenty years, then it is spectacular. Big dividends are gratifying every month, then disappointing at the final tally.
In summary
- You are more than ten years from living off your portfolio: pure growth, minimal distributions, and let it compound.
- You live or will soon live off your investments: dividend ETFs become relevant to generate income without selling.
- In every case, judge a fund on its total return, never on its distribution rate.
- Be wary of an advertised yield above 8%: ask where the money comes from. Often, part of it comes from your own pocket.
The 13% fund in your feed is not a scam. It is simply the tool of a different life stage, the one your growth portfolio is precisely building for you. To understand the exact mechanics of these products, see our article on covered-call ETFs (UMAX, QMAX, ZPAY...).
This article is provided for informational purposes only and does not constitute personalized financial advice. Consult a licensed professional before making investment decisions.