If you’re looking to build your retirement savings with an investment that offers passive income and long-term growth potential, the iShares S&P/TSX Composite High Dividend Index ETF (TSX: XEI) is certainly worth considering.
In fact, it currently offers an annual yield of roughly 3.4% and pays its distributions monthly.
However, what makes it appealing for retirement savings is that those payments can be useful whether you need the income today or are still years away from retiring.
Because while you’re building your portfolio, reinvesting those distributions allows you to accumulate additional units and increase the income your investments can generate over time. Then, once you retire, you can collect the cash to help cover your expenses.
So, here’s what makes XEI worth considering and why individual dividend stocks can still be useful alongside it.
A Canadian dividend ETF to buy and hold for years
One of the biggest benefits of owning XEI is that it gives you exposure to roughly 75 Canadian dividend stocks without having to build that portfolio yourself.
However, how those investments are weighted is also important.
Its benchmark limits individual stocks to 5% and sectors to 30% at each quarterly rebalancing. That helps prevent one massive company or industry from taking up an increasingly large portion of your investment.
Financials and energy still account for roughly 60% of XEI’s portfolio, while utilities make up another 14%.
That primarily gives you exposure to businesses earning money from lending, transporting energy and supplying electricity, alongside producers that can benefit when commodity prices rise.
So, although XEI spreads your money across dozens of companies, its performance still depends heavily on those industries. That’s worth understanding when deciding how it fits alongside your other retirement investments.
Furthermore, the income it pays is only part of the return investors can earn.
For example, XEI generated a total return of roughly 29% from the beginning of the year through October 26, including reinvested distributions.
And while you obviously shouldn’t expect gains like that every year, it still demonstrates why the yield alone doesn’t tell you everything about what an investment can offer.
For retirement savings, that combination matters because you can collect income while continuing to own businesses with opportunities to expand their operations and increase their value over the long haul.
A higher-yield stock to own alongside your retirement ETF
While XEI offers a straightforward way to own Canadian dividend stocks, it doesn’t own every attractive income investment.
For example, Alaris Equity Partners (TSX: AD.UN) isn’t in its portfolio and currently offers a yield of roughly 6.7%, with quarterly distributions.
Alaris is an intriguing stock because it provides capital to established private businesses, primarily through preferred equity investments. That gives investors exposure to companies they generally couldn’t buy directly on the TSX.
Furthermore, those preferred investments generally pay Alaris distributions that are set for a year at a time and adjusted annually based on measures such as sales or gross profit.
So, its investments are structured to generate income while allowing that income to increase as those businesses grow. Plus, Alaris also owns common equity interests, allowing it to benefit from increases in those businesses’ value.
And Alaris isn’t solely dependent on the growth of its current investments. In fact, it’s continually looking for new businesses to invest in, giving it additional opportunities to grow its income.
Those recent investments helped drive a 41.8% year-over-year increase in net distributable cash flow in the second quarter, while its portfolio expanded to 25 partners.
More importantly, Alaris paid out only about 58% of its net distributable cash flow through the first half of the year, leaving cash available to strengthen and expand its business.
In fact, Alaris has already increased its distribution twice this year, giving investors growth in their income alongside its attractive starting yield.
So, while XEI and other high-quality dividend ETFs can provide a useful foundation for your retirement savings, Alaris is a good example of how the right individual stock can add exposure to businesses you couldn’t otherwise own while boosting your income over the long haul.