While owning individual stocks can be great, they can also be quite challenging to buy. Choosing the right stock can often come down more to luck than to skill. Even if you do choose the right stock, you may have the wrong timing. If things don’t go your way, and you have a large position in one company, it can lead to large capital losses and frustration.
If you are an income investor, having money rolling in is probably more important than owning any individual stock. As a result, there are some excellent, income-generating ETFs that may be worth a look. ETFs can provide excellent income generation and global diversification that may be difficult to achieve using individual stocks alone.
The ETFs listed here are all Bank of Montreal (TSX: BMO)(NYSE: BMO) products and are listed on the Toronto Stock Exchange. The ETFs are each constructed using stocks from three regions: Canada, the United States, and Europe. All three ETFs use a covered call strategy, which involves selling covered calls on a portion of the underlying stocks. The covered call premiums generate the higher income than dividends alone can provide, leading to higher monthly distributions than the underlying stocks themselves.
As you will see with all the ETFs listed here, the fees are higher than a more general index ETF due to the costs involved in implementing a covered call strategy. The management expense ratio (MER) will take some of the profits out of your pocket, but it will more than likely be cheaper and easier than if you tried to generate income using your own covered call strategy.
BMO Canadian covered call ETFs
There are two ETFs that might appeal to many Canadian dividend investors: BMO Covered Call Utilities ETF (TSX: ZWU) and BMO Covered Call Canadian Banks ETF (TSX: ZWB). These ETFs hold many Canadian dividend companies in the banking and utility sectors. ZWU currently pays a distribution of 6.3% and ZWB pays a distribution of 4.81%. ZWU has a MER of 0.71% and ZWU costs 0.72%
BMO American covered call ETFs
There are two covered call ETFs that consist of American stocks. These are BMO Covered Call Dow Jones Industrial Average Hedged to CAD ETF (TSX: ZWA) and BMO US High Dividend Covered Call ETF (TSX: ZWH). Each of these ETFs provides an excellent monthly yield, with ZWA at 4.17% and ZWH paying 5.22%. Both these stocks are exposed to some of the biggest dividend-paying companies in the United States. Of the two, ZWH has the biggest variety of stocks, making it the more diversified of the two. ZWH also has a U.S. dollar version, (TSX: ZWH.U), which allows you to buy units and receive distributions in U.S. dollars.
BMO Europe covered call ETF
While many Canadians have some exposure to the United States, far too many Canadians do not have investments outside North America. BMO Europe High Dividend Covered Call Hedged to CAD ETF (TSX: ZWE) holds many large European companies that operate worldwide. The ETF pays a distribution of 6.52% on a monthly basis and has a MER of 0.72%.
Laying it all down
These three BMO dividend ETFs are useful for gaining monthly income while providing you with a large amount of diversification. However, there are some negatives that investors should consider. For one thing, the MERs on each of these ETFs are quite expensive compared to standard index ETFs. Also, while the covered calls give extra income, they also limit the upside on the stocks since when the covered call is executed, the stock must be sold.
These high-yielding ETFs offer investors excellent income and quite a bit of diversification for investors looking for income. But these are not going to be massive capital gains machines, and the fees are higher than ETFs that do not use complicated strategies such as covered calls. If you are a long-term investor looking for steady, monthly income, these ETFs may be the ones for you.
