When it comes to dividend investing, particularly in the realm of ETFs, two popular choices among investors are the Vanguard U.S. Dividend Appreciation ETF (VIG) and its Canadian counterpart, the Vanguard U.S. Dividend Appreciation Index ETF (VGG). Both aim to provide investors with exposure to U.S. companies that have a history of increasing dividends, but they come with their nuances, especially when considering the investment vehicle, such as a Registered Retirement Savings Plan (RRSP) or a Tax-Free Savings Account (TFSA) in Canada. (VIG vs VGG)
Executive summary VIG vs VGG
| Feature | VIG (U.S. Dividend Appreciation ETF) | VGG (Vanguard U.S. Dividend Appreciation Index ETF) |
|---|---|---|
| Listing | NYSE | TSX |
| Currency | USD | CAD |
| Ideal for | RRSP accounts due to U.S.-Canada tax treaty benefits | TFSA accounts for more straightforward tax handling |
| Withholding Tax | No U.S. withholding tax on dividends in RRSP | Withholding taxes apply, but less relevant in a TFSA |
| Investor Focus | Suitable for those seeking U.S. dividend growth stocks and are comfortable with USD investments | Designed for investors wanting exposure to U.S. dividend stocks without currency conversion concerns |
| Tax Efficiency | High in RRSP due to tax treaty | High in TFSA due to Canadian listing and no need for currency conversion |
| MER | 0.10% | 0.29% |
| Access | Direct access to U.S. markets, may require currency conversion | Easy access for Canadian investors, traded in CAD |
VIG: Vanguard U.S. Dividend Appreciation ETF
VIG is listed on the NYSE and primarily targets U.S. investors, although it’s also accessible to international investors, including Canadians. It tracks the performance of the NASDAQ US Dividend Achievers Select Index, comprising U.S. stocks that have a record of increasing dividends for at least ten consecutive years. VIG’s appeal lies in its focus on companies with the potential for long-term capital appreciation and a steady increase in dividends, making it an attractive option for growth-oriented dividend investors. This ETF is designed to follow an index comprised of U.S. companies that also meet rigorous standards for sustaining dividends. As a result, the ETF’s holdings represent some of the most reliable and esteemed businesses in the U.S. market.
One significant advantage of holding VIG, especially for Canadian investors, comes into play within an RRSP. Thanks to the tax treaty between Canada and the U.S., Canadian investors holding U.S.-listed securities like VIG in an RRSP are exempt from U.S. withholding taxes on dividends. This makes VIG particularly appealing for long-term holdings in an RRSP, where the compounding effect of reinvested dividends can significantly enhance portfolio growth over time without the drag of withholding taxes.
VGG: Vanguard U.S. Dividend Appreciation Index ETF
VGG, on the other hand, is a Canadian-listed ETF that seeks to replicate the performance of the U.S. Dividend Appreciation Index, excluding withholding taxes. It offers Canadian investors direct exposure to U.S. dividend-paying stocks but is traded in Canadian dollars on the Toronto Stock Exchange, making it more accessible and eliminating the need for currency conversion for Canadian investors.
For investments within a TFSA, VGG stands out as the better choice. The TFSA’s unique tax-free status does not extend to recovering withholding taxes on foreign dividends. Therefore, holding a Canadian-listed ETF that invests in U.S. stocks, like VGG, can be more tax-efficient. Investors benefit from the growth and dividend payouts of U.S. companies while avoiding the complexity and potential tax inefficiencies associated with foreign withholding taxes.
Monthly Dividend Calendar (Canadian stocks – TSX)
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Comparing VIG and VGG
Investors holding Canadian dollars might lean towards VGG, whereas those with investments in U.S. dollars could prefer VIG. This is due to its significantly reduced management expense ratio (MER) – VIG’s MER stands at 0.10%, in contrast to VGG’s 0.29%. While dividends from international companies typically face less advantageous tax considerations, the fund has demonstrated commendable tax efficiency to date.
In terms of investment strategy, both ETFs align with a long-term, dividend-growth approach. Investors looking for steady income along with capital appreciation may find these ETFs aligning with their investment goals. However, investors should base their choice between VIG and VGG on their account type (RRSP vs. TFSA), tax situation, and currency preference.
Conclusion
For Canadian investors, the choice between VIG and VGG is not merely about the underlying dividend growth strategy but also involves considering the investment account and the associated tax implications. Holding VIG in an RRSP can maximize the benefits of the U.S.-Canada tax treaty, enhancing long-term growth without the burden of withholding taxes. For TFSAs, where such tax advantages do not apply, VGG offers a more straightforward and potentially more tax-efficient way to gain exposure to U.S. dividend growth stocks. As with any investment decision, it’s crucial to consider one’s financial goals, tax situation, and investment horizon before choosing between VIG and VGG.
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