Canadian stock market investors have plenty of opportunities to generate a passive income. Investing in dividend stocks is probably one of the most popular methods. Building a portfolio of high-quality dividend stocks and then storing the holdings in a Tax-Free Savings Account (TFSA) can even be part of an excellent retirement plan.
Income-generating assets held in a TFSA can grow your wealth without incurring any taxes on capital gains, interest, or dividends. If you are investing in a retirement portfolio in a TFSA and don’t have the time to manage a portfolio of individual stocks, dividend-paying exchange-traded funds (ETFs) can be another excellent alternative to achieve the same goal.
Today, I will discuss two dividend-paying Hamilton ETFs that provide monthly distributions. While both focus on the reliable Canadian financial industry, they use different strategies for diversification.
High-risk exposure to big banks
Hamilton Enhanced Canadian Bank ETF (TSX:HCAL) is an ETF that investors with a higher risk tolerance can consider to maximize growth and income in their TFSA portfolio. The HCAL ETF tracks the Solactive Equal Weight Canada Banks Index. This index tracks the performance of only the Big Six Canadian banks, allocating an equal proportion across the biggest financial services providers in the country.
The higher risk and reward don’t come so much from its exposure to just six stocks. Rather, it is due to the leverage the ETF uses. It borrows up to a quarter of its net asset value (NAV) to invest more money into the stocks, getting a 1.25 times exposure to the banks. This means that the ETF will experience higher losses when the top banks struggle but an even greater reward when they perform well. As of this writing, it offers an inflated annualized 6.58% dividend yield that it distributes every month.
A safer play in the financial services sector
If you are a more risk-averse investor, Hamilton Canadian Financials Index ETF (TSX:HFN) might be a better fit for your portfolio. This ETF is perfect if you want to own all the biggest financial stocks in Canada in the form of one neatly packaged asset. The fund tracks the Solactive Canadian Financials Equal-Weight Index.
The index holds 12 of the largest financial stocks in Canada in equal proportions. You get to invest in the Big Six alongside four insurance giants and two of the top asset management and holding companies. The diversification from banks into insurance and asset management provides a bit more stability when any one of the sectors underperforms. As of this writing, HFN ETF boasts a 3.57% annualized dividend yield that it pays out in monthly distributions.
Foolish takeaway
Using the available contribution in your TFSA strategically can be an excellent part of your retirement plan. Holdings in a TFSA can grow in value without the Canada Revenue Agency (CRA) taking away any of it in taxes. Slowly growing your portfolio during your working years can set you up with plenty of tax-free passive income to enjoy in your golden years.
Balancing the TFSA portfolio with low-risk and high-risk investments can be a great way to offset risk exposure without compromising long-term wealth growth. To this end, HCAL ETF and HFN ETF can be excellent investments to consider.
