Passive income investing doesn’t need to be difficult. Undoubtedly, screening out TSX stocks by yield (let’s say 5% or even 7%) could limit your options. And what remains if you screen out all the lower yields will be names that you may find less than wonderful. Of course, you’ll always have the so-called dividend traps (firms that could be at higher risk of reducing their dividend payouts at some point over the medium term unless fortunes manage to turn) that you’ll need to steer clear of.
At the end of the day, it’s far better to go for the robust business with rock-solid cash flows and modest yields than the sky-high one with little support or foundation. Indeed, just as you wouldn’t buy a home with an unstable foundation, you shouldn’t buy a stock with a dividend that has a stretched payout ratio and limited or decaying cash flows. Indeed, it could be asking for an implosion of a dividend.
In this piece, we’ll have a closer look at a pair of high-yield ETFs that make it too easy to score a solid dividend that’s safer while providing a reasonable degree of diversification.
The following specialty income ETFs make good use of a strategy called covered calls, which essentially trades off capital gains potential for premium income that’s added on top of the dividends you’ll already get from holdings within the basket of stocks. Let’s look closer at two names with hefty yields worth considering right now.
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BMO Covered Call Utilities ETF
First, we have my top pick in the high-income universe right now with the BMO Covered Call Utilities ETF (TSX: ZWU), which boasts a huge 7.6% yield. Behind the hood, we have a wide selection of well-run defensive utility firms, many of which already have a fairly respectable dividend yield.
The covered call options-writing strategy takes it a step further, essentially supercharging the yield by some amount (it’s really based on how much call options are going for at any given instance). In any case, as the utility rally runs out of steam, I’m a fan of the ETF, especially if you’re in the market for a more than 7% yielder. With a 0.62 beta, I consider ZWU to be a great source of passive income for investors looking to play defence while reducing their overall portfolio’s correlation to the rest of the stock market.
BMO Canadian High Dividend Covered Call ETF
The BMO Canadian High Dividend Covered Call ETF (TSX: ZWC) may be a better fit for investors seeking broader exposure to numerous sectors. The ETF invests in a slew of names across varying industries. The yield currently sits at 6.7%, which is nearly a full percentage point lower than the ZWU. While I like ZWU for the lower beta (it’s 0.88 for the ZWC right now) and higher yield, I’m certainly not against picking up shares of the ZWC as well for the sake of diversification.
Additionally, utility-specific headwinds (should they appear in the second half) will be less hard on shares of ZWC. Personally, picking up both the ZWC and ZWU ETF could make for a potent one-two combo for those who are fans of covered calls as a means to get more income flowing in! Just be aware that covered call ETFs aren’t the best for capital gains potential (more yield, less appreciation potential).
