The Motley Fool

2 High-Yield Canadian Bank ETFs to Supplement Your CPP Pension

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If you’ve opted to receive Canadian Pension Plan (CPP) payments sooner rather than later, the amount of monthly income you’ll receive may be lacklustre and insufficient to finance even the most frugal lifestyle.

As such, you’ll need to take things into your own hands by supplementing your CPP payments with higher-yielding dividend stocks, so you’ll be able to make ends meet and potentially have enough financial wiggle room to spoil the kids.

When it comes to large and growing dividends, it’s tough to beat the Canadian banks. After a tumultuous year with rising provisions from credit losses (PCLs), surging expenses, and shrinking net interest margins (NIMs), many of the big Canadian banks are now trading at discounts to historical average valuations.

Some of the winners in the banking class of 2019, like National Bank of Canada, have outperformed in spite of the credit downturn and now command a well-deserved premium.

The well-managed bank has shown it can keep the ship steady amidst rougher waters and is thus a terrific bet for those who are worried that credit won’t completely normalize in 2020.

On the other end of the spectrum, we have premium banks like TD Bank that have taken a rare stumble and are no longer sporting hefty premium multiples.

Both National Bank, TD Bank and all other banks have their own stories, but if you’re looking for a quick income fix, the simplest way to lock-in a slightly higher-than-average yield for a modest price of admission is to bet on the broader basket.

Consider the BMO Equal Weight Banks ETF (TSX:ZEB) and its higher-yielding covered call counterpart; the BMO Covered Call Canadian Banks ETF (TSX:ZWB), two simple one-stop-shop ways to get good income and growth without paying a fortune in fees. The ZEB and ZWB sport 3.7% and 5.5% yields, respectively, at the time of writing.

The latter flavour of the bank, the ZWB, invests in the same Canadian banks as the ZEB, the only significant difference being that it also incorporates the covered call strategy, effectively allowing the ZWB to command a slightly higher yield.

In short, the covered call strategy implemented by the ZWB trades upside potential for premium income from written options against long positions in banks.

If you’re of the belief that the Canadian banks will surge higher over the next year or so, the ZEB will outperform the ZWB. And if the banks tread water or sink, the ZWB will be the winner.

If you don’t want to bet on the trajectory of the banks in the year ahead, but do want a hedge that can grant you higher income, the ZWB ought to be your flavour of choice.

Notably, the ZWB is more labour-intensive for management and, as a result, you’ll be charged a slightly higher management expense ratio (MER) of 0.71% relative to the more passive ZEB and its 0.6% MER.

The ZWB effectively has its upside capped, which would be a bad thing if the banks come roaring back next year. The capped upside grants you a higher degree of predictability, however.

If you do need the extra income boost to supplement your pension, it may be worthwhile to go with the ZWB, even if you’re optimistic about the trajectory of the Canadian banks in the year ahead.

The ZWB is just a way to be cautiously optimistic, which is never a bad thing given that 2020 is sure to be a year that’s full of uncertainty.

Stay hungry. Stay Foolish.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette owns shares of TORONTO-DOMINION BANK.

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