Dividend-paying investments are often a popular choice for investors looking to generate a consistent stream of income on a monthly basis. One such option available on the TSX is Harvest Diversified Monthly Income ETF (TSX:HDIF). This exchange-traded fund (ETF) is specifically designed to offer investors regular monthly cash distributions., making it an appealing choice for those seeking a predictable income stream.
About the stock
HDIF is managed by Harvest Portfolios Group, a Canadian investment management company with a focus on providing innovative investment solutions. The primary investment objective of this particular exchange-traded fund (ETF) is to provide investors with high monthly cash distributions. This is done by strategically investing in a well-diversified portfolio of income-generating assets. This diversified portfolio can include a mix of equities (stocks), bonds, and other types of income-producing securities. To further enhance the income generated by the fund and reduce overall portfolio volatility, HDIF employs a covered call strategy on a portion of holdings.
The fund’s diversified investment approach helps mitigate some of the risks associated with investing in a single asset class. Or even a concentrated number of securities. By holding a mix of different types of investments, HDIF provides a more stable and consistent stream of returns.
The covered call strategy that the fund utilizes involves selling call options on the underlying securities held within the portfolio. This strategy generates additional income for the fund in the form of the premiums received from selling these options. This additional income can act as a buffer against potential downturns in the market — particularly as the premiums collected can help to offset any declines in the value of the underlying securities held by the fund. However, it’s important to understand this strategy can also limit the fund’s potential for capital appreciation — especially if the underlying securities experience significant price increases. The upside potential is thus effectively capped by the strike price of the call options that have been sold.
Earning income
The dividend stock provides its unitholders with a monthly distribution of $0.071 per unit. When this monthly distribution is annualized, it amounts to approximately $0.852 per unit per year. Right now, this results in an annual yield of about 10%. This level of yield can be quite attractive for investors seeking higher returns. Compared to more traditional fixed-income investments, particularly in a low-interest-rate environment.
Potential investors in HDIF should be aware that while the fund offers an attractive distribution yield, it is not without certain risks. The overall performance of the fund is inherently subject to fluctuations in the broader market. The value of the various holdings within its diversified portfolio can increase or decrease depending on market conditions and the performance of the individual securities. Furthermore, the use of a covered call strategy, while it can enhance income and reduce volatility, may also limit the fund’s ability to participate fully in significant upward movements in the prices of its underlying holdings.
It is also important for investors to carefully consider the tax implications associated with investing in dividend-paying ETFs like HDIF. The distributions received from the fund may be subject to taxation, depending on the investor’s individual tax situation and the type of account in which the ETF is held. Consulting with a qualified tax professional can provide clarity and guidance on how these distributions may impact one’s overall tax obligations.
Bottom line
Harvest Diversified Monthly Income ETF provides an opportunity for investors to earn a high monthly cash distribution through its diversified portfolio and the use of a covered call strategy. This approach aims to deliver consistent income and manage risk. Yet potential investors should carefully consider the associated risks. These include market fluctuations and the potential limitation on capital appreciation due to the covered call strategy. As well as their own individual financial goals and risk tolerance before making an investment decision. As always, conducting thorough research and consulting with a qualified financial advisor is highly recommended to ensure that any investment aligns appropriately with one’s individual financial objectives and risk tolerance.
