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

Do you want high yields from multiple stocks all at once? Then consider these three top ETFs for life!

Amy Legate-Wolfe

Author Bio Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances. Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities. She also provides investors with a daily newsletter, Canada Stock Digest, for daily market updates. Her work can also be found at Canada's National Observer, where she writes on the business side of climate action. Before joining Motley Fool Canada, Amy wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog, and travel with her husband. Social Media Follow Amy on LinkedIn and Canada Stock Digest. Favorite Investment Quote “October: This is one of the particularly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

Published November 29, 2024 3:30 pm EST

High-yield exchange-traded funds (ETF) can be a cornerstone of any portfolio, especially for those looking to build a steady stream of passive income. These funds invest in a basket of dividend-paying stocks, pooling the income from multiple sources and distributing it to investors. The result is consistent payouts that can help you meet financial goals without the hassle of picking individual stocks or closely monitoring the market. For investors focused on income generation, these offer the added benefit of being relatively hands-off — ideal for those who want their money to work quietly in the background.

Why these investments?

One of the standout features of high-yield ETFs is their regular income. Many of these funds distribute dividends monthly or quarterly, making each an excellent tool for those who rely on their investments to cover living expenses. For retirees, this consistency can replace a paycheque. Younger investors, meanwhile, can reinvest the payouts, using the magic of compounding to build wealth over time. It’s like having a steady income stream without needing to punch a clock.

Another key benefit is diversification. High-yield ETFs typically include a mix of companies from various sectors, such as financials, energy, utilities, and real estate. This broad exposure reduces the risk of one company or sector dragging down the entire portfolio. For instance, if energy stocks dip due to falling oil prices, gains in utilities or financials might offset the loss. By spreading your investment across multiple industries, these ETFs help smooth out the ride.

Top choices

Now, let’s talk specifics. Hamilton Enhanced Multi-Sector Covered Call ETF (TSX: HDIV), Harvest Enhanced Diversified Income ETF (TSX: HDIF), and iShares S&P/TSX Composite High Dividend Index ETF (TSX: XEI) are three compelling options for Canadian investors seeking high yields.

HDIV is an innovative option designed for those who want high yields with an enhanced twist. It primarily holds covered call ETFs, which use options strategies to generate extra income. As of October 31, 2024, HDIV has delivered an annualized return that outpaced the S&P/TSX 60 Index by 3.68% since its launch in July 2021. That’s no small feat. Investors also benefit from an impressive annualized yield at writing of about 11.03%, paid monthly. This makes HDIV a standout for those prioritizing income without sacrificing long-term growth potential.

HDIF takes a slightly different approach. It focuses on a diversified mix of income-generating assets, blending equity and fixed-income exposure for balanced returns. While it’s relatively new, its strategy aligns with the needs of income-seeking investors who value stability. Its emphasis on diversification ensures that payouts remain robust even during turbulent market conditions. HDIF’s design makes it a strong choice for those looking for consistent returns without leaning too heavily on one sector — all while paying a 9.93% yield!

XEI, however, is a classic choice for high-dividend investing. Tracking the S&P/TSX Composite High Dividend Index, this ETF offers exposure to 75 of Canada’s top dividend-paying companies across various industries. With a distribution yield of approximately 5.03% at writing and a year-to-date return of 19%, XEI has proven itself to be a reliable performer. It’s especially attractive for those who want a straightforward, low-cost option for tapping into Canada’s dividend powerhouses.

Bottom line

Looking ahead, these ETFs remain well-positioned to thrive. Canada’s dividend-paying sectors, such as financials and energy, continue to offer strong cash flows, and the use of options strategies in funds like HDIV adds an extra layer of income potential. With inflation moderating and interest rates stabilizing, the demand for income-focused investments is unlikely to wane, thereby bolstering the future prospects of high-yield ETFs.

Together, HDIV, HDIF, and XEI are excellent tools for generating passive income while diversifying risk. These cater to different investment styles, from the enhanced strategies of HDIV to the simplicity of XEI and the balanced approach of HDIF. By integrating high-yield ETFs into your portfolio, you can enjoy consistent income, the benefits of diversification, and a pathway to long-term financial security. For those seeking to make their money work harder with minimal fuss, these ETFs deliver on all counts.