How I’d invest $1,000 in December to Make Easy Passive Income

These BMO covered call ETFs are great for generating passive income.

| More on:
Canadian Dollars

Image source: Getty Images

The 2023 Tax-Free Savings Account, or TFSA, contribution limit is out, and it’s been bumped up to a cool $6,500. For many Canadians, consistently maxing this account out can set you up for a rewarding and well-funded retirement plan.

Investments in a TFSA are not taxed, and that makes this account a great place to hold income-generating assets. If your goal is passive income, holding investments like dividend stocks in a TFSA can be a good way of generating regular tax-free income.

However, holding just a few stocks isn’t the greatest for diversification. My suggestion is to use various income-oriented, exchange-traded funds (ETFs) that hold a portfolio of income-generating assets. This approach can be less volatile and better for the long term.

Let’s look at my top two picks today that I would invest $1,000 in for easy passive income!

BMO Canadian High Dividend Covered Call ETF

BMO Canadian High Dividend Covered Call ETF (TSX:ZWC) starts by investing in a portfolio of quality, high-yielding Canadian dividend stocks. Then the ETF sells covered call options. By selling these options, the ETF converts some of its future upside potential into an immediate cash premium.

The proceeds from these option sales are paid out to investors on a monthly basis. As a result, ZWC pays a very high dividend. Currently, the ETF has an annualized distribution yield of 6.58%, which rivals some of the larger energy stocks but with less risk, as ZWC is more diversified.

The annualized distribution yield is the percentage an investor can expect to receive in a year if the most recent dividend remains consistent at the current share price. It’s not precise, but it’s a good approximation. ZWC charges a management expense ratio, or MER, of 0.72%.

BMO Covered Call Dow Jones Industrial Average Hedged to CAD ETF

BMO Covered Call Dow Jones Industrial Average Hedged to CAD ETF (TSX:ZWA) might be a good alternative for investors desiring exposure to U.S. blue-chip stocks. ZWA holds 30 stocks that track the Dow Jones Industrial Average index and sells covered call options on it.

As with ZWC, proceeds from the covered call options are paid out to ZWA investors on a monthly basis. If you want U.S. sources of income to diversify a Canadian-heavy portfolio, ZWA could be ideal. Currently, the ETF has an annualized distribution yield of 6.28%.

Because ZWA holds U.S. stocks, the ETF also implements currency hedging to protect your investment against fluctuations in the CAD-USD pair. If the Canadian dollar appreciates against the U.S. dollar, the currency hedge prevents ZWA from losing additional value. ZWA also charges a MER of 0.72%.

The Foolish takeaway

Investors looking for a hands-off passive-income investment with high yields and monthly dividends could do worse than ZWC or ZWA. Both ETFs offer greater diversification compared to individual dividend stocks and are professionally managed on your behalf by BMO.

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 Dividend Stocks

grow money, wealth build
Dividend Stocks

Got $3,000? 3 TSX Growth Stocks to Buy in January 2023

Top TSX growth stocks that look appealing for 2023.

Read more »

woman data analyze
Dividend Stocks

Need Passive Income? Turn $15,000 Into $851 Annually

This passive-income stock is already climbing higher, up 16% in the last three months! Yet it's still valuable, so you…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

Retirees: 3 Reliable Canadian Dividend Stocks to Buy Now for Passive Income

Top TSX dividend stocks now appear oversold.

Read more »

Dividend Stocks

For $100 in Passive Income Each Month, Buy 1,500 Shares of This REIT

REITs such as Northwest Healthcare can enable investors create a passive-income stream as well as benefit from capital gains.

Read more »

A colourful firework display
Dividend Stocks

2 Canadian Growth Stocks (With Dividends) to Start 2023 With a Bang

Here are two of the best dividend-paying Canadian growth stocks you can invest in at the start of 2023 and…

Read more »

sale discount best price
Dividend Stocks

4 Insanely Cheap Canadian Stocks to Buy for Passive Income

The recent bear market has created some incredible bargains, especially for those looking for passive income. Here are four cheap…

Read more »

A bull outlined against a field
Dividend Stocks

3 Cheap Stocks I’d Buy Before the Bull Market Arrives

Undervalued TSX stocks such as Savaria and Well Health can help investors generate market-beating gains when markets recover.

Read more »

Increasing yield
Dividend Stocks

5 Canadian Dividend Stocks With Yields of 4% or More

If you want dividends that yield over 4%, you don't have to look far. Here are five large-cap Canadian stocks…

Read more »