2 High-Yield Dividend ETFs to Buy to Generate Passive Income

These two high-yield Hamilton ETFs pay monthly distributions.

Tony Dong, MSc, CETF®

Tony started investing during the 2017 marijuana stock bubble. After incurring some hilarious losses on various poor stock picks, he now adheres to Bogleheads-style passive investing strategies using index ETFs. Tony graduated in 2023 from Columbia University with a Master's degree in risk management. He holds the Certified ETF Advisor (CETF®) designation from The ETF Institute. Tony's work has also appeared in U.S. News & World Report, USA Today, NYSE ETF Central, NASDAQ Fundinsight, Cboe ETF Market, TheStreet, and Benzinga. He is the founder of ETF Portfolio Blueprint (https://etfportfolioblueprint.com)

Published October 11, 10:00 pm EDT

| More on: HDIVHYLD

If you’re looking to generate passive income and you have enough initial capital to invest, one of the most effective strategies could be to invest in high-yield dividend exchange-traded funds (ETFs) that pay out monthly.

When held in a Tax-Free Savings Account (TFSA), these ETFs can provide you with regular, tax-free income, helping you earn money without the worry of additional taxes on your gains.

Today, we’re spotlighting two standout ETFs from Hamilton ETFs that are especially suited for this purpose. Here’s a closer look at these high-yield opportunities.

Hamilton Enhanced U.S. Covered Call ETF

One popular ETF for generating passive income is the Hamilton Enhanced U.S. Covered Call ETF (TSX:HYLD).

This ETF is actually a fund of funds, holding a collection of eight other Hamilton ETFs, each of which employs a covered call strategy. These ETFs collectively aim to mirror the sector makeup of the S&P 500.

So, what exactly does this covered call strategy involve? In simple terms, the ETFs within HYLD sell what are known as call options on the stocks they hold. These options grant other investors the right to buy these stocks at predetermined prices within a specified timeframe.

By selling these options, HYLD earns immediate income from the option premiums – essentially the fee other investors pay to secure the purchase price.

However, there’s a trade-off: while HYLD benefits from these upfront payments, it also agrees to cap potential profits from any stock price increases beyond these set prices. This strategy sacrifices some future gains for more predictable, immediate returns, making it appealing for those who prioritize regular income.

To enhance its income potential further, HYLD employs leverage – it borrows additional funds, up to 25% of its total assets, to invest more heavily in its underlying ETFs.

While this can amplify returns when markets rise, it also heightens the risks, as losses can be magnified during market declines.

Regarding its payouts, HYLD’s last monthly distribution was $0.143 per share. With a share price of $13.91 as of October 9, this translates into an impressive annualized yield of 12.3%.

Hamilton Enhanced Multi-Sector Covered Call ETF

A complementary choice to HYLD for generating passive income is the Hamilton Enhanced Multi-Sector Covered Call ETF (TSX:HDIV).

Like HYLD, HDIV employs a covered call strategy combined with up to 25% leverage, but it takes a different approach in its benchmarking.

Instead of following the S&P 500, HDIV targets the S&P/TSX 60, which shifts its focus more towards Canadian stocks.

This means HDIV is less concentrated in tech and healthcare compared to HYLD, and more weighted towards financials and energy sectors. This variation can provide a nice balance if you’re looking to diversify your investment across different sectors and geographical regions.

HDIV also offers strong income potential, similar to HYLD. Its last monthly distribution was $0.171 per share. Given its current share price of $17.39, this distribution rate translates into an annualized yield of 11.8%.