There’s never been more selection for Canadian passive income investors looking to give themselves a big, fat raise. Of course, chasing yield can be a risky idea, especially when it comes to individual names that are down and out, with yields that might not last another year. Indeed, when you go hunting for yield in the stock markets by screening out all other names with dividend yields south of a certain percentage (let’s say 6% or so), there might be more risk than the low price-to-earnings (P/E) multiple might suggest.
Sure, as a stock moves lower and it becomes cheaper (at least based on traditional valuation metrics), the risk should go down. But going on raw P/E alone (or any other single valuation metric) might not be the best idea, especially if the company is talking about facing serious, and perhaps long-lasting, even structural, headwinds that are working against earnings growth.
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High-yield boosters are compelling
Indeed, if earnings are projected to slide, the multiples that scream “bargain” might actually be pushing you down the path of a value trap. If you can analyze such distressed high-yielders and position yourself carefully, the rewards (beyond just the yield) could be great. But for most investors who don’t want to jump into the deep end of the risk waters, I think specialty income ETFs are worth a look.
Covered calls might not be worth it for all investors, but if you’re a monthly income investor or just willing to spend to get a higher yield without the catastrophic risks associated with the so-called “accidental” high-yielders, the broad basket of specialty income ETFs is worth a look. In some instances or market climates, they might be well worth the premium MER.
Hamilton Enhanced Canadian Covered Call ETF
The Hamilton Enhanced Canadian Covered Call ETF (TSX:HDIV) stands out as one of my favourite risk-on yield boosters these days, and it’s not just the 10% yield. The ETF has actually outperformed the TSX 60 by a few percentage points since its inception. For a yield-focused ETF, that’s huge. It means early investors haven’t had to sacrifice total returns to get the yield jolt.
But, of course, that’s in the past, and investors should look ahead, not behind. Either way, I think the HDIV was built to continue giving the TSX a good run for its money, all while offering a magnificent monthly payout that’s far richer than the quarterly payout offered by the TSX Index!
Beyond the covered call strategy, which entails the writing of covered calls against the holdings for premium income, there’s 25% leverage to “enhance” the yield. Indeed, investors should be careful when they hear about leverage. But, in the case of the HDIV, I think the 25% cash leverage is more than manageable.
The 25% cash leverage is the asterisk (but not a deal-breaker)
Of course, higher risk means higher rewards. In an up market, the HDIV looks poised to outpace the TSX 60. But once the tables turn, it’s the TSX 60 that could have the edge. Normally, I’m against leveraged ETFs, but 25%, I think, seems modest for young investors who are willing to raise the risk/reward bar in a way that’s very unique.
Now, a modest amount of leverage isn’t going to be for everyone. But for the risk-tolerant who need a raise at all costs, the ETF is worth a closer look. I’d view it as a bit of spice in a portfolio that’s otherwise well-diversified. As long as you treat it like a risk-on yield booster or a hint of spice, I think the HDIV can make an income portfolio that much more flavourful. Just don’t overdo it!
