The universe of Canadian stocks that pay monthly dividends is surprisingly small. If you restrict yourself to monthly payers, your portfolio usually ends up concentrated in real estate investment trusts and royalty trusts. That limitation isn’t great for diversification.
Once you move into exchange traded funds (ETFs), monthly payouts become far more common. One high yield option that has caught a lot of attention is the Harvest Diversified Monthly Income ETF (TSX:HDIF), which currently offers a 9.8% yield with monthly distributions.
This is not a traditional dividend ETF, though. It uses leverage and covered call strategies, which add complexity and risk. If those terms sound unfamiliar, this is the kind of ETF you want to understand before even thinking about investing.
What Is HDIF?
HDIF is best described as a fund of funds. Instead of owning individual stocks directly, it holds a basket of other Harvest ETFs that target different equity income themes.
Inside the portfolio, you’ll find exposure to large U.S. blue chip stocks across sectors, U.S. technology companies, healthcare leaders, global utilities, Canadian equity income, U.S. banks, travel and leisure companies, industrial leaders, low volatility Canadian stocks, and global real estate investment trusts. The result is a multi-sector, multi-region income-oriented portfolio.
Most of the underlying ETFs use an active covered call strategy. In simple terms, this means they sell call options on the stocks they own. By doing so, they give up upside potential in exchange for option income. The tradeoff is limited capital appreciation but higher cash flow.
To further boost income, Harvest also uses leverage. The fund can borrow up to about 33% of its asset value, or roughly 1.33 times exposure. This works similarly to using margin in a brokerage account. Leverage can increase returns and yield, but it also magnifies losses during market downturns, which is an important risk to understand.
How Much Is the Distribution?
One of the defining features of HDIF is its monthly distribution. The current payout is set at $0.0741 per unit, paid every month. To receive a distribution, you need to own the ETF before the ex-dividend date, which is announced monthly.
Based on the current distribution level and share price, the fund’s yield works out to about 9.8% on an annualized basis. However, that yield is not guaranteed. It depends on both the distribution amount and the market price of the ETF.
If the unit price falls while the distribution stays the same, the yield rises. If market conditions deteriorate or income from the underlying strategies declines, distributions can be reduced.
Remember, HDIF is an income-focused product, not a capital growth one. Investors should expect most of their return to come from monthly cash payments rather than price appreciation.
