2 Ways to Generate Income in Retirement Without Going Back to Work

These two ETFs can help retirees obtain a steady stream of investment income.

| More on:
Retirees sip their morning coffee outside.

Source: Getty Images

The dominant consideration for retirees living off their investment portfolios is ensuring a safe withdrawal rate. This is how much a retiree can pull from their accounts every year without depleting their portfolio prematurely, with an often-cited rule being 4%.

Even with the Canada Pension Plan (CPP) and Old Age Security (OAS), the unfortunate reality is that some retirees will have to supplement their retirement income with part-time work. To avoid this, Canadians should start saving and investing as early as possible in a diversified portfolio of stocks.

For those who are retired, there are alternatives to selling part of your investment portfolio for income. Today, I’ll be highlighting two income-oriented exchange-traded funds, or ETFs that yield over 5% a year. Both are designed with consistent monthly income needs in mind. Please note that we at the Fool do not recommend putting such a large sum into just one or two stocks. We prefer a diversified portfolio. These are just examples to show the benefits of investing in ETFs.

BMO Canadian High Dividend Covered Call ETF

BMO Canadian High Dividend Covered Call ETF (TSX:ZWC) offers investors a much higher yield than regular dividend stocks via the use of covered calls. These are options that sell the potential future upside of a stock in exchange for an immediate cash premium.

ZWC manages to achieve a current annualized distribution yield of 6.86% thanks to its dual-strategy. First, the ETF holds 35 Canadian blue-chip, dividend paying stocks, mostly from the financial and energy sectors. Then the ETF sells call options periodically to enhance that income.

In terms of fees, ZWC costs a management expense ratio of 0.72%. This is the annual fee deducted from your overall investment over time. If you invested $1,000,000 in ZWC, you could expect to pay $7,200 in fees per year but also receive $68,600 in distributions, which is enough for retirement income.

iShares Canadian Financial Monthly Income ETF

Some investors might not like derivative-based strategies like covered calls, and that’s OK. Covered calls might provide income, but they can cause funds to underperform their vanilla counterparts during bull markets. A good alternative here is iShares Canadian Financial Monthly Income ETF (TSX:FIE).

FIE holds a variety of different assets from the Canadian financial sector — a historically well-performing part of the overall TSX. The ETF produces a 7.31% annualized distribution yield by targeting financial sector dividend stocks, preferred shares, and corporate bonds.

Compared to ZWC, FIE has greater sensitivity to changes in interest rates and is less diversified due to its concentration in the financial sector. Its management expense ratio is also higher at 0.84%. If you invested $1,000,000 in FIE, you’d pay $8,400 in fees and receive $73,100 in distributions annually.

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 Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Investing

analyze data
Dividend Stocks

2 Dividend Stocks I’d Buy if They Fall a Bit

Consider buying Brookfield Asset Management (TSX:BAM) and another top stock on a larger pullback.

Read more »

Man holding magnifying glass over a document
Stocks for Beginners

Watching This 1 Key Metric Could Help You Beat the Stock Market

This data marker can tell you exactly what you can expect from the future of companies, and whether that's a…

Read more »

Payday ringed on a calendar
Dividend Stocks

TFSA Investors: 2 of the Best Monthly Dividend TSX Stocks to Buy Right Now

Create a monthly tax-free income stream in your TFSA by investing in these two TSX dividend stocks that pay investors…

Read more »

edit Colleagues chat over ketchup chips
Investing

3 Defensive TSX Stocks for Lower-Risk Investors

These three Canadian stocks could be great picks for a defensively minded investor.

Read more »

Dollar symbol and Canadian flag on keyboard
Dividend Stocks

3 Top Canadian Dividend Stocks to Buy Under $30

Given their stable cash flows and healthy dividend yields, these three dividend stocks are excellent additions to your portfolio.

Read more »

Investing

3 Top Reasons to Buy Great-West Lifeco Stock After its Q4 Earnings

These factors make GWO stock attractive for investors looking for a fundamentally strong, dividend-paying stock from the financial sector.

Read more »

money cash dividends
Dividend Stocks

Beat the Dow Jones With This Cash-Gushing Dividend Stock

Here's why this high-dividend TSX stock should beat the Dow Jones index in 2024 and beyond.

Read more »

Pixelated acronym REIT made from cubes, mosaic pattern
Dividend Stocks

The Top Canadian REITs to Buy in February 2024

Are you looking to boost your income and buy some stocks at a bargain? Here are three top REITs that…

Read more »