A lot of the highest-yielding investments available to Canadians tend to be narrowly focused. Real estate investment trusts (REITs), income trusts, covered call funds, and other niche income products can all generate attractive distributions, but they often come with greater concentration risk and significant downside risks.
Traditional dividend stocks have their own limitations as well. Many pay quarterly rather than monthly, which can make cash flow less predictable. Building a diversified portfolio of individual stocks also takes time and ongoing maintenance. That is why I generally think diversification should come before yield, even for passive income investing.
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How to diversify and still generate income
One interesting solution is the BMO Balanced ETF Portfolio (TSX:ZBAL) and its income-oriented counterpart ZBAL.T. Both ETFs are built around the same underlying globally diversified portfolio consisting of approximately 60% equities and 40% fixed income.
Through a collection of underlying exchange-traded funds (ETFs), investors gain exposure to Canadian, U.S., international developed, and emerging-market stocks, along with a diversified bond allocation.
The portfolio is automatically rebalanced and currently carries a management expense ratio (MER) of just 0.18%. The key difference is that ZBAL.T is designed specifically for investors seeking regular cash flow through a 6% annual managed distribution policy.
How much do you need to generate $500 per month?
As of June 12, ZBAL.T paid a monthly distribution of $0.05 per share and traded at approximately $11.43 per unit. To generate $500 per month, you would need:
That works out to roughly 10,204 shares. At a share price of $11.43 as of writing, the required investment would be:
In other words, an investor would need approximately $116,600 invested in ZBAL.T to generate about $500 per month based on the current distribution rate. Held inside a Tax-Free Savings Account (TFSA), those distributions can be withdrawn completely tax-free.
What I like about this approach is that investors are not relying on a concentrated portfolio of dividend stocks, covered calls, or leverage. Instead, they are generating cash flow from a globally diversified balanced portfolio that continues to maintain meaningful exposure to both stocks and bonds.
For retirees, in particular, there is also a practical benefit. Many retirees end up selling shares periodically to fund spending anyway. A managed distribution fund simply automates part of that process. Rather than manually deciding what to sell and when, the ETF handles the mechanics for you while maintaining the target asset allocation.
