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

High-yield dividend ETFs can be major winners in any portfolio, offering diversification, returns, and security. But which are the best?

| More on:
ETF stands for Exchange Traded Fund

Source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

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.

Should you invest $1,000 in Hamilton Enhanced Multi-sector Covered Call Etf right now?

Before you buy stock in Hamilton Enhanced Multi-sector Covered Call Etf, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Hamilton Enhanced Multi-sector Covered Call Etf wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

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 Amy Legate-Wolfe 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.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Dividend Stocks

woman analyze data
Dividend Stocks

Secure Dividends: How to Turn $10,000 Into Reliable Passive Income

Earn a secure dividend income of over $150 every quarter by investing in these reliable Canadian dividend stocks.

Read more »

top TSX stocks to buy
Dividend Stocks

Buy the Dip: This Top TSX Dividend Stock Just Became a Must-Own

This retail dividend stock is a Canadian legend, allowing investors to get in on some serious action with a strong…

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

How to Build a $1 Million TFSA Starting With Just $10,000

Two established, high-yield dividend stocks can help turn a small seed capital into a million-dollar TFSA.

Read more »

money cash dividends
Dividend Stocks

Here’s How Many Shares of FIE You Should Own to Get $500 in Monthly Dividends

This monthly-paying dividend ETF is simple to understand.

Read more »

sale discount best price
Dividend Stocks

Is This Correction Your Chance? Top 5 Canadian Dividend Stocks on Sale

For value, income, and long-term growth, check out these top five dividend stocks.

Read more »

Stethoscope with dollar shaped cord
Dividend Stocks

Canadian Investors: Buy WELL Health Stock Right Now

WELL Health (TSX:WELL) stock might be on the downturn right now, but a bargain for value-seeking investors for their self-directed…

Read more »

A worker gives a business presentation.
Dividend Stocks

3 No-Brainer Canadian Stocks to Buy Under $70

Investing in stocks need not require you to burn a hole in your pocket. You can invest $70 to $100…

Read more »

View of high rise corporate buildings in the financial district of Toronto, Canada
Dividend Stocks

Canadian Real Estate Stocks Plummet: Is it Time to Sell or Buy?

Real estate stocks have a lot going for the, especially dividends. But are they all a buy or due to…

Read more »