Retirees: How to Earn Tax-Free Income in 2023 to Supplement Your OAS and CPP Payouts

These two high-yielding ETFs can help retirees meet their retirement income needs.

| More on:
TFSA and coins

Image source: Getty Images

Canada has a fairly robust social security system in place compared with the U.S. With both Canada Pension Plan (CPP) and Old Age Security (OAS) payouts, retirees are assured at least a baseline standard of living throughout their golden years. The Canadian Retirement Income Calculator can help you estimate your income in your retirement years.

However, if you have a maxed-out Tax-Free Savings Account (TFSA) that has compounded over the years, you have the potential to significantly enhance your retirement income. Holding income-generating investments here can be a good idea given their tax-free treatment.

My exchange-traded fund, or ETF, picks today are designed to help retirees meet withdrawals without having to sell shares. Both of them also pay out monthly as opposed to individual dividend stocks, which pay quarterly. Thanks to their underlying assets and strategies, both ETFs also pay high yields.

iShares Canadian Financial Monthly Income ETF

The iShares Canadian Financial Monthly Income ETF (TSX:FIE) provides high monthly income potential via exposure to a variety of assets from the Canadian financial sector. This includes dividend stocks, corporate bonds, preferred shares, and income trusts.

Currently, FIE pays an annualized distribution yield of 6.96%. This is the percentage yield an investor can expect to receive annually if the most recent dividend remains consistent at the current share price. As noted earlier, FIE pays out monthly, which is good for those living off investment income.

Holding FIE will cost a management expense ratio (MER) of 0.84% per year. This is one of the downsides of the ETF. Compared to dividend ETFs or index ETFs, FIE is expensive. It’s also not the most diversified ETF given that all of its holdings come from the financial sector.

BMO Canadian High Dividend Covered Call ETF

A more diversified option might be the BMO Canadian High Dividend Covered Call ETF (TSX:ZWC), which holds dividend stocks from the energy, financial, utilities, telecom, and consumer staples sectors to name a few. The ETF enhances the yield from these dividend stocks by selling covered calls.

Basically, covered calls are options that convert the future upside potential of the ETF into an immediate cash premium. This premium is paid out on a monthly basis along with the yield from the dividend stocks. Currently, ZWC has an annualized distribution yield of 6.58%.

Personally, I like ZWC better than FIE as it has greater diversification. I’m not a fan of corporate bonds or preferred shares either due to their interest rate sensitivity. As a bonus, ZWC also charges a lower management expense ratio of 0.72%.

The Foolish Takeaway

Retirees looking for monthly income investments in their TFSA could use either ZWC or FIE to achieve higher-than-average yields. Neither of these ETFs is likely to see strong growth over the long term, but that’s not really a concern for retirees. As with all investments, ensure you diversify!

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

A close up image of Canadian $20 Dollar bills
Dividend Stocks

Level Up Your Passive Income With 3 High-Yielding Stocks

Given their solid underlying businesses and high dividend yields, these three companies are an excellent buy for income-seeking investors.

Read more »

Man data analyze
Dividend Stocks

Beat the TSX With This Unstoppable Dividend Payer

BCE Inc. (TSX:BCE) could outperform the market with its dividend growth.

Read more »

Profit dial turned up to maximum
Dividend Stocks

Canadian Tire Stock Rose 15% in January 2023

Canadian Tire (TSX:CTC.A) stock continues to climb upwards yet still trades in value territory and with a solid dividend, as…

Read more »

Canadian Dollars
Dividend Stocks

TFSA Investors: Where to Invest $6,500 in 2023

Here are three TSX stocks for TFSA investors.

Read more »

Money growing in soil , Business success concept.
Dividend Stocks

3 Cheap Stocks for Premium Passive Income

These cheap stocks not only offer strong passive income, they also have been climbing higher in the last month.

Read more »

Payday ringed on a calendar
Dividend Stocks

Need $100? The Best Dividend Stocks for Monthly Income

These two dividend stocks are the best choices on the market if you want the best bang for your buck…

Read more »

edit Businessman using calculator next to laptop
Dividend Stocks

Should You Invest in A&W Revenue Royalties Income Fund for its 5.1% Dividend Yield?

The A&W Revenue Royalties Income Fund is a top bet for income-seeking investors given its dividend yield of 5.1%.

Read more »

Retirees sip their morning coffee outside.
Dividend Stocks

TFSA Retirees: How to Supplement Your CPP and OAS Payout in 2023

Blue-chip dividend stocks can help retirees create a recurring revenue stream to support CPP and OAS payouts in 2023.

Read more »