By Tony Dong, MSc, CETF on July 29, 2026 Estimated reading time: 9 minutes

Dividend ETFs make you money, just not for the reasons you think

By Tony Dong, MSc, CETF on July 29, 2026 Estimated reading time: 9 minutes

Dividend ETFs do not guarantee market-beating returns. They boost your portfolio thanks to factor exposure and behavioural benefits.

According to Cboe Canada’s ETF Market Screener, as of July 14, 2026, the Canadian ETF industry consists of 2,025 listed funds, having recently surpassed the $1 trillion assets under management (AUM) milestone. Of those 2,025 ETFs, 158, or 7.8%, explicitly mention “dividend” in their name. That popularity reflects just how strongly Canadian investors gravitate toward dividend investing.

It is particularly popular among newer investors. One of the most common ideas promoted online is the so-called “dividend snowball.” You buy dividend-paying stocks, collect the distributions, reinvest those dividends into additional shares, receive even more dividends, and compound from there.

There is certainly truth to the importance of reinvesting dividends. According to backtesting platform Testfolio, a $10,000 investment in the SPDR S&P 500 ETF Trust (SPY) made at the fund’s 1993 inception would have grown to approximately $310,847 by mid-July 2026 with dividends reinvested. Without reinvesting dividends, that same investment would have been worth about $175,008. That translates into an annualized return of 10.82% versus 8.85% without dividend compounding, or cumulative returns of 3,008.47% compared with 1,605.08%.

But that does not automatically mean dividend ETFs are superior investments. Many dividend ETFs have historically lagged the broader market, whether because they charge higher management fees, exclude faster-growing sectors such as technology, or place less emphasis on growth stocks. Like any strategy that departs from a broad, market-cap-weighted index, dividend investing introduces active bets that may outperform in some environments and underperform in others. That said, many investors conclude from this debate that dividend ETFs are either excellent investments or poor ones. 

I think both views miss the point. Dividend ETFs can absolutely be good investments. The reasons, however, are often different from those commonly promoted on financial social media and repeated by finfluencers. Understanding where dividend investing actually adds value can help investors make much better decisions about whether these ETFs belong in their portfolios.

Why dividends are not free money

A dividend is simply a payment made by a company to its shareholders out of retained earnings. It is one way management can return capital to investors after the business has generated profits. So, why would a company choose to do that instead of reinvesting the money?

In many cases, management simply does not believe it has a better use for the cash. It may not see attractive opportunities to expand the business, acquire competitors, or buy back its own shares at current valuations. Rather than allowing excess cash to accumulate on the balance sheet, it distributes that capital back to shareholders.

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