High-yield exchange-traded funds (ETFs) have become a popular choice for investors seeking to generate passive income. By pooling together a diverse array of dividend-paying stocks, these ETFs offer a convenient and efficient way to earn regular income without the need to manage individual stock selections. Among the myriad of options available, the Hamilton Enhanced Multi-Sector Covered Call ETF (TSX: HDIV) and the Vanguard FTSE Canadian High Dividend Yield Index ETF (TSX: VDY) stand out as exceptional choices for Canadian investors. So let’s get into why.
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The advantage
One of the primary advantages of high-yield ETFs is their ability to provide consistent income streams. HDIV, for instance, boasts an impressive annualized yield of approximately 11.8% as of writing. This means that for every $1,000 invested, an investor could expect to receive about $118 in annual income, assuming distributions remain consistent. Such a substantial yield is particularly attractive in today’s low-interest-rate environment, thereby offering a compelling alternative to traditional fixed-income investments.
VDY also offers a robust dividend yield, making it a strong contender for income-focused investors. While specific yield figures can fluctuate based on market conditions, VDY’s focus on high-dividend-yielding Canadian companies ensures a steady stream of income. This ETF tracks the FTSE Canada High Dividend Yield Index, which includes companies characterized by high dividend yields.
Strong performance
Beyond attractive yields, both HDIV and VDY have demonstrated commendable performance over time. HDIV has outperformed the S&P/TSX 60 by an annualized 3.7% since its inception on July 19, 2021, while delivering a total return of 15.5% over the same period. This outperformance underscores the ETF’s ability to generate both income and capital appreciation, thereby enhancing overall returns for investors.
VDY’s performance has also been noteworthy. In 2023, the ETF achieved a net return of 8.4%, following a slight decline of 0.19% in 2022. These figures highlight VDY’s resilience and capacity to deliver positive returns even amid market volatility.
Future outlook
Looking ahead, the future outlook for both HDIV and VDY remains promising. HDIV’s strategy of employing covered call options across multiple sectors positions it to continue delivering high yields while mitigating downside risk. This approach is particularly beneficial in uncertain market conditions, as it provides a cushion against potential declines.
VDY’s focus on Canadian companies with high dividend yields offers exposure to sectors that are integral to the Canadian economy, such as financials and energy. As these sectors recover and grow, VDY stands to benefit from both dividend income and potential capital gains, thus making it a compelling option for investors seeking long-term income generation.
Moreover, the management expense ratios (MERs) for these ETFs are competitive, ensuring that investors retain a larger portion of their returns. For instance, VDY’s MER is 0.22% as of June 30, 2024, which is relatively low compared to other investment options.
Bottom line
Together, high-yield ETFs like HDIV and VDY offer an effective means of generating passive income. The attractive yields, strong performance histories, positive future outlooks, and diversification benefits make them standout choices for investors seeking to enhance income streams. By incorporating these ETFs into a well-balanced portfolio, investors can enjoy the benefits of regular income with the added potential for capital appreciation.
