TD Canadian Aggregate Bond ETF's Dividend Cut: Navigating Yield and Rate Risks in 2025

The TD Canadian Aggregate Bond Index ETF (TDB.TO) recently announced an 11.11% reduction in its quarterly dividend, dropping from $0.045 to $0.04 per unit. This cut, effective in early 2025, underscores the challenges bond investors face in a high-rate environment. While TDB's forward yield now stands at 3.69%, its sustainability and relative appeal compared to peers require scrutiny. Let's dissect the factors driving this decision and evaluate its place in a portfolio.

The Dividend Cut: Context and Causes

The cut, which reduced TDB's distribution by $0.005 per unit, reflects broader shifts in Canada's bond market. Bond ETFs like TDB derive income from coupon payments of their underlying holdings. When interest rates rise, new bonds issued at higher yields replace older, lower-yielding bonds in the portfolio, diluting the average income. With the Bank of Canada's policy rate at 4.75% and the 10-year government bond yield at 3.8%, the pool of bonds offering high coupons has shrunk. TDB's dividend growth of 20.12% over three years (likely driven by a period of rising rates and reinvestment) has now reversed as rates stabilize. Investors must reconcile this cut against the ETF's long-term role as a stable income source.

Yield Comparison: TDB vs. Peers

While TDB's forward yield of 3.69% is respectable, it lags behind key competitors. The iShares Core Canadian Universe Bond ETF (XBB.TO) and BMO Aggregate Bond ETF (ZAG.TO) both offer 4.5% yields, benefiting from similar duration profiles but potentially higher-yielding corporate bonds. The Vanguard Canadian Aggregate Bond ETF (VAB.TO), at 3.9%, sits between TDB and the leaders. Meanwhile, the long-duration TD Canadian Long Term Federal Bond ETF (TCLB.TO) offers 3.14%, trading off yield for duration risk.

Macro Factors: Rates, Inflation, and ETF Risks

The Bank of Canada's pause on further rate hikes has created a temporary calm, but uncertainty persists. Bond ETFs face two threats: rising rates (which depress prices) and inflation (which erodes real returns). With Canadian inflation at 3.5%, TDB's yield provides a nominal buffer but struggles to outpace costs. Shorter-duration ETFs like XSHG (3.65% yield, 1–5-year corporate bonds) or iShares High Quality Canadian Bond ETF (XQB.TO, 4.33% yield) may offer better inflation resilience while balancing credit risk.

Investment Considerations

1. Income Focus: TDB remains a core holding for balanced portfolios, but its yield disadvantage means investors should overweight higher-yielding peers like XBB or ZAG unless they prioritize TD's brand reliability.
2. Duration Risk: TDB's duration (estimated ~7 years, similar to peers) means its price will decline if rates rise further. Investors with shorter horizons may favor shorter-term ETFs.
3. Cost Efficiency: TDB's 0.15% expense ratio is above Vanguard's 0.09% (VAB) and BMO's 0.09% (ZAG), making cost-sensitive investors think twice.
4. Historical Growth Caution: While TDB's three-year dividend growth was robust, the 2025 cut shows how external factors can reverse trends. Investors should avoid extrapolating past performance.

Final Recommendation

For most portfolios, avoid overconcentration in TDB. Instead:
- Core Fixed Income: Allocate to ZAG or XBB for their higher yields and diversified holdings.
- Enhanced Income: Consider XQB or XSHG for better returns without excessive duration risk.
- TDB's Role: Retain a small position for liquidity and diversification, but rebalance proceeds from higher-yielding ETFs.

The bond market's new reality demands a mix of yield, duration discipline, and cost awareness. TDB's cut is a wake-up call to adapt—not abandon—fixed-income exposure.