Power Up Your TFSA: This TSX-Listed ETF Delivers Tax-Free Monthly Cash Flow

Are you looking to generate consistent monthly cash flow from your Tax-Free Savings Account (TFSA)?

If so, exchange-traded funds (ETFs) are the way to go.

While it might seem tempting to run out and buy monthly-paying dividend stocks, the fact is that such stocks come from a narrow pool that restricts your investment universe. Choosing exclusively from among them is a restriction not related to long-term performance–in other words, it is an economically irrational choice likely to result in a lower-than-average quality portfolio.

ETFs, however, often offer monthly payouts without arbitrary restrictions. They usually hold fairly typical portfolios of quarterly payout stocks, using “storage tanks” and “dividend smoothing” to achieve a consistent monthly payout. In this article, I’ll explore a monthly-paying dividend ETF with a staggering 10.23% yield.

Hamilton Enhanced Multi-Sector Covered Call ETF

Hamilton Enhanced Multi-Sector Covered Call ETF (TSX:HDIV) is a Canadian high-yield dividend ETF that uses covered calls to increase the yield on the underlying common stock holdings. Going by the current dividend payments and stock price, HDIV yields 10.23%. As a fully Canadian ETF built on Canadian stocks, it is 100% tax-free when held in a TFSA (in contrast to some U.S. stocks that require you pay taxes to the IRS even when you hold them in a TFSA).

How much money can you get by investing in HDIV?

According to the fund’s website, the yield is 10.55%. According to a third-party data platform I looked at, the yield is 9.94%. Given the mixed signals, I decided to work out the “true” yield myself.

HDIV’s current dividend is $0.183 per month, which works out to $2.196 per year. Its price is $21.45. Based on this information, the fund’s “true” yield is 10.23%, and you’d get $1,023 in annual cash back on a $10,000 position. Here’s how the math on that works.

Holdings

The Hamilton Enhanced Multi-Sector Covered Call ETF basically holds a collection of Hamilton’s other ETFs. These funds cover a broad swath of Canadian energy stocks, utility stocks, financials, mining stocks, and real estate investment trusts (REITs). Ultimately, you’ll get a lot of the same stocks that a typical broad market TSX fund would hold, albeit with different weightings and some REIT exposure.

So, HDIV is not pushing it with obscure monthly pay stocks in order to achieve its high yield. It pulls in various amounts of portfolio income each month and uses cash management strategies to achieve a relatively constant monthly payout.

Covered calls

So, how does HDIV get its high yield when it basically holds a pretty typical Canadian stock portfolio?

The answer is with covered calls.

A call is an option that provides a payout when the price of a security crosses the exercise price (a price agreed on ahead of time). You have to pay the difference between the price at expiration and the exercise price. When you sell “covered” calls, you don’t have to actually pay out any cash that you hold; you simply sell the shares at the exercise price, then the buyer sells them at the higher market price, providing him/her with a profit. You get paid a fee to sell off your shares like this. If the shares never hit the exercise price, then you simply collect the fee without having to sell off your stocks. For this reason, covered calls are very effective in sideways (non-trending) markets.

HDIV sells covered calls to enhance the yield on its portfolio. The use of these options decreases potential upside, but provides an attractive yield. While you might bemoan having to sell off your shares, 10.23% is nothing to sneeze at. So, HDIV could be a good way to get some income into your portfolio.