Most Canadian dividend stocks fall somewhere between 3% and 5%. Banks tend to sit toward the lower end of that range, while telecom companies and pipelines often lean toward the higher end.
Move up a bit further, into the 6% to 8% range, and you usually start encountering real estate investment trusts (REITs) and royalty income trusts. These are generally income-first investments where investors accept slower growth in exchange for larger distributions.
Once yields climb above 8%, the mechanics usually change again. At that level, you often see exchange-traded funds (ETFs) that rely on financial engineering to boost income. Covered call strategies are common, whereby the fund sells options on its holdings to generate extra cash flow. Some funds also use modest leverage to enhance yield.
There is nothing inherently wrong with these strategies. But investors should understand the trade-offs. These ETFs tend to have higher fees, greater volatility, and they may underperform a simple index fund over long periods.
Still, if the goal is steady income rather than maximum growth, they can be useful tools. Today we are looking at two diversified examples from Hamilton ETFs. One focuses on the U.S. market, the other on Canada, and both currently offer yields in the 10% to 12% range.
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Hamilton Enhanced Multi-Sector Covered Call ETF
The Hamilton Enhanced Multi-Sector Covered Call ETF (TSX: HDIV) is designed as a diversified income portfolio built from mainly Canadian sector ETFs.
Rather than holding individual stocks, HDIV owns a basket of other Canadian ETFs focused on areas such as financials, utilities, pipelines, real estate, and healthcare. These sectors are already known for relatively stable dividends.
Hamilton then layers two additional strategies on top. First, the fund writes covered calls on portions of the underlying holdings. This means it sells options on those positions, collecting option premiums that are distributed to investors as income.
Second, the fund applies modest leverage of roughly 1.25 times to the portfolio. Borrowing allows the fund to increase its exposure to income-generating assets, which helps boost the yield.
The result is a monthly income stream that is significantly higher than that of most Canadian dividend ETFs. Based on the most recent monthly distribution annualized, HDIV currently yields about 9.9%.
Of course, this comes with trade-offs. Covered calls cap some of the upside if markets rally strongly, and leverage can amplify losses during downturns. But for investors primarily focused on income, HDIV provides broad exposure.
Hamilton Enhanced U.S. Covered Call ETF
If you want a similar income strategy focused on the United States, the Hamilton Enhanced U.S. Covered Call ETF (TSX: HYLD) takes the concept one step further.
HYLD holds a portfolio of U.S. equity ETFs, giving investors exposure to major American sectors and indices. These include large-cap U.S. stocks and other diversified equity strategies.
Like HDIV, Hamilton enhances the income by writing covered calls and applying moderate leverage to the portfolio.
The difference is that HYLD targets the deeper and more diversified U.S. market, which offers a broader set of companies and industries like tech and finance than the Canadian market alone.
Because of this structure, HYLD currently delivers an even higher income stream. Based on the latest monthly distribution annualized, the ETF yields about 12.9%.
Again, investors should recognize the trade-offs. Covered call strategies limit some upside during strong bull markets, and leverage increases sensitivity to market swings. These ETFs are designed primarily for income rather than maximum long-term capital growth.
But for investors seeking a diversified monthly cash flow from U.S. equities, HYLD offers one of the higher yields currently available in the Canadian ETF market.
