Although investing can seem quite complex and daunting for new investors, it doesn’t have to be that complicated. In fact, for most investors, the best results come from keeping it simple, staying disciplined, and letting time do the heavy lifting. That’s why exchange-traded funds (ETFs) continue to grow in popularity for Tax-Free Savings Account (TFSA) investors, especially for those looking to earn consistently growing dividend income.
The key to having success when it comes to investing is having a long-term mindset, keeping your emotions in check when markets get volatile, and taking advantage of the power of compounding.
Compounding is what turns small, consistent investments into significant wealth over time. Every dividend you reinvest and every bit of growth that builds on itself adds up, especially over years and decades.
That’s why dividend stocks and ETFs are such a powerful tool for long-term investors who consistently contribute to their TFSAs. Not only do dividend ETFs provide you with steady growth over time, but they also return cash to you quarterly or even monthly, allowing you to reinvest that cash and accelerate the compounding process.
Furthermore, ETFs offer investors instant diversification, helping to lower the risk of the investment and saving investors hours of research required to pick individual stocks. That’s how ETFs are making it much simpler for Canadians to invest.
So, with that in mind, if you’re looking for a high-quality Canadian ETF that offers a solid dividend and returns cash monthly, here’s why BMO Canadian High Dividend Covered Call ETF (TSX: ZWC) is one of the best.
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What is a covered call ETF, and why is it ideal for TFSA dividend investors?
There are a number of different high-quality ETFs for Canadians to choose from, but there’s no question that one of the very best and most unique choices for dividend investors to buy in their TFSA is the ZWC.
As the name suggests, this ETF not only holds a basket of high-dividend Canadian stocks but also uses a covered call strategy to enhance its yield.
By selling call options on some of the stocks it holds, the ETF generates extra income, which boosts the overall payout investors receive. That means the ETF offers a higher yield than you’d typically get from just holding the same underlying stocks, which is why it’s so appealing to dividend investors with cash in their TFSAs.
The trade-off is that selling covered calls limits some of the capital gains potential that the ETF has if stock prices rise sharply. So, although the ZWC offers higher income for investors, it also provides slightly less long-term capital appreciation compared to a traditional dividend ETF.
Despite that trade-off, the ZWC is still the top choice for many dividend investors, though, because the extra yield provides more immediate cash flow and less volatility, especially in sideways or choppy markets.
Furthermore, that increased income, which is also being paid out monthly, can be reinvested immediately to take full advantage of the power of compounding. And when you buy the ZWC ETF in your TFSA, where all distributions are sheltered from tax, the compound interest you earn over time can be substantial.
Why is ZWC a good investment today?
Although ZWC is most popular for its attractive dividend yield, there are far more reasons why it’s an excellent long-term investment for TFSA investors.
First off, the fund holds a diversified mix of some of the most stable, profitable, and high-dividend-paying companies in Canada. That includes leaders in sectors such as financials, energy, telecom, and utilities, some of the most well-established and defensive businesses that provide essential services and generate billions in cash flow each year. Plus, many of those businesses are constantly increasing their dividends, leading to consistent dividend growth for the ETF.
Therefore, in the current environment where there is still so much economic uncertainty, owning a high-yield ETF that’s still reliable is one of the best investments you can make. And right now, the ZWC offers a yield of roughly 6.1%.
So, if you’ve got cash in your TFSA that you’re looking to invest in a high-quality dividend stock, there’s no question the ZWC is one of the best ETFs Canadian investors can consider today.
