Dividend-Focused Strategies: Why Yield Alone Is Not Enough

With headline risk dominating today’s market backdrop, investors have been navigating a choppy environment, and many have turned to dividend‑focused strategies. The appeal is understandable: companies that can pay stable and growing dividends often signal confidence, maturity, and financial strength.

That interest is visible in ETF flows. Dividend‑focused ETFs across the Canadian, U.S., and international markets have amassed more than $47.09 billion, with $11.25 billion of that coming in last year alone.¹

Historically, these strategies have helped investors meet spending needs without being forced to sell underlying holdings, particularly during market drawdowns. In other words, investors can get paid while waiting for the dust to settle. Dividend strategies may also help dampen volatility, supporting total returns by providing an ​“anchor” when price moves are unpredictable.

Importantly, dividends have been a meaningful component of long‑term equity returns. Since 1926, dividends contributed approximately 31% of the S&P 500’s monthly total return, while capital appreciation contributed 69%² (see Chart 1).

Chart 1: Capital Appreciation & Dividends Contributions to S&P 500’s Total Returns

Source: S&P Dow Jones Indices LLC. Data from December 1926 to February 2025. For illustrative purposes. The S&P 500 was launched March 4, 1957. All data prior to index launch date is back-tested hypothetical data.³

Yet yield alone isn’t enough. Investors should look beyond the headline dividend yield, because a higher yield can sometimes reflect deteriorating fundamentals rather than income strength. This is often referred to as a ​“yield trap”, which is when a stock’s yield becomes artificially elevated because its price has fallen sharply in response to weakening business conditions.

MORE: Read our latest BMO Dividend ETFs Portfolio Manager Market Outlook

So, what should investors look for when evaluating dividend‑focused strategies?

A Rules‑Based Approach to Dividend Strategies

BMO Global Asset Management (BMO GAM) has offered dividend‑focused strategies since 2011. Recognizing how the market environment has evolved, the portfolio management team made a deliberate decision in late 2025 to enhance and modernize the approach, aiming to deliver a more consistent income experience and support resilient wealth outcomes for clients (see Chart 2).

The enhanced framework applies a proprietary four‑step, rules‑based portfolio construction process across BMO GAM’s dividend ETFs. The objective is straightforward, which is to start with quality and fundamentals screen to help avoid deteriorating companies. Dividend screens are then used to boost overall yield (see Chart 3). In practice, this means the investable universe is first assessed for dividend-paying companies with strong underlying fundamentals, attractive valuations, and evidence of market support, prioritizing durability over simply selecting the highest‑yielding names.

Finally, the methodology includes deliberate portfolio construction guardrails designed to reduce the risk of unintended concentration, helping avoid excessive exposure to any single stock and/​or sector that could unbalance the portfolio (see Chart 4).

For more information regarding the methodology please see: BMO Dividend ETFs: Portfolio Construction Methodology

Chart 2: From Good to Great – Original vs. Optimized Approach

Chart 3: A Disciplined Process Behind Sustainable Income

Chart 4: Target Portfolio Construction Controls

Source: BMO Global Asset Management, as of March 31, 2026.

Putting the Methodology into Action: Stock Selection in Practice

To bring the enhanced methodology to life, Chart 5 highlights two examples of stocks selected through BMO’s rules‑based framework. Sienna Senior Living (Ticker: SIA), a constituent in BMO Canadian Dividend ETF (Ticker: ZDV), and AT&T (Ticker: T) a constituent in BMO US Dividend ETF (ticker: ZDY). Both offer attractive yield at 4.1% while meeting the disciplined, quality-centred stock selection criteria.

Chart 5: Quality Income Grounded in Solid Fundamentals

Resilient Income

To meet the investor interest in dividend-focused strategies across different markets, BMO GAM offers three cost-effective ETFs: ZDV, ZDY, and BMO International Dividend ETF (Ticker: ZDI) which provide exposure to Canadian, U.S., and international dividend paying stocks, respectively. Currency-hedged versions are also available for US (BMO US Dividend Hedged-to-CAD – Ticker: ZUD) and international (BMO International Dividend Hedged-to-CAD – Ticker: ZDH) equity exposures to minimize the impact of currency volatility (see Chart 6). 

Since introducing the enhancements in late 2025, these ETFs have been designed to deliver resilient income and returns in a volatile market environment. This further illustrates that focusing on high‑quality, cash‑generative companies while avoiding yield traps and speculative growth can be key to delivering strong results. (see Chart 7)

Chart 6

Chart 7: Dividend Yields

Chart 8: Performance

¹ Morningstar Direct. Data is as of March 31, 2026. Canadian Dividend and Income Equity and U.S. Dividend and Income Equity Morningstar categories were used for Canadian and U.S. equity ETFs’ AUM and flows, while Morningstar’s International Equity category was used for dividend focused international equity ETFs’ AUM and flows. 

Morningstar Direct data as of March 31, 2026. Canadian and U.S. Dividend & Income Equity categories were used for Canadian and U.S. Equity ETF AUM and flows, while International Equity category was used for dividend-focused international Equity ETFs.

² S&P DJI, S&P 500 Dividend Aristocrats: The Importance of Stable Dividend Income.

³ Data, not actual performance, and is based on the index methodology in effect on the index launch date. However, when creating back-tested history for periods of market anomalies or other periods that do not reflect the general current market environment, index methodology rules may be relaxed to capture a large enough universe of securities to simulate the target market the index is designed to measure or strategy the index is designed to capture. For example, market capitalization and liquidity thresholds may be reduced; history is based on the index constituents that meet the custody element as of the Launch Date. Also, the treatment of corporate actions in back-tested performance may differ from treatment for live indices due to limitations in replicating index management decisions. Complete index methodology details are available at www.spglobal.com/spdji. Back-tested performance reflects application of an index methodology and selection of index constituents with the benefit of hindsight and knowledge of factors that may have positively affected its performance, cannot account for all financial risk that may affect results and may be considered to reflect survivor/​look ahead bias. Actual returns may differ significantly from, and be lower than, back-tested returns. Past performance is not an indication or guarantee of future results.