Imagine one $7,000 Tax-Free Savings Account (TFSA) contribution sending roughly $64 back into your account every month. The original investment stays put, while a fresh deposit arrives 12 times a year, ready to reinvest or help cover retirement expenses.
That sounds wonderfully close to a personal ATM, although investors cannot simply press a button and demand more cash. The income depends on market conditions, financial stocks, and an options strategy designed to turn volatility into larger monthly distributions.
Source: Getty Images
Why monthly income works
The CRA generally allows interest, dividends, distributions, and capital gains to grow tax-free inside a TFSA. Withdrawals also will not affect federal income-tested benefits, giving retirees a flexible source of cash without adding taxable income.
That tax shelter becomes especially useful when an investment produces a double-digit yield. Still, investors need to understand where the extra income comes from, since Canada’s major banks certainly aren’t paying 11% dividends on their own.
The Hamilton Canadian Financials Yield Maximizer ETF (TSX:HMAX) bridges that gap. The fund owns 10 large Canadian financial companies and combines their dividends with income earned from selling covered-call options.
How HMAX generates income
HMAX holds familiar names including the Big Six Banks, insurance, and asset managers. Banks represented 76.9% of the portfolio at the end of June, while insurers and asset managers supplied the remaining exposure.
Those holdings provide the financial foundation, then covered calls increase the cash available for distribution. The fund sells another investor the right to purchase some holdings at predetermined prices, collecting option premiums in exchange.
This strategy tends to work well when markets move sideways or become volatile, since HMAX can collect option income without using leverage. The trade-off appears during powerful rallies, when those contracts can limit how much upside the fund captures.
Even with that limitation, the strategy has attracted more than $2.5 billion in assets. HMAX stock currently advertises an annualized yield of about 11%, based on its latest distribution and the unit price used by the fund at the end of June.
What $7,000 could produce
HMAX recently paid $0.17 per unit monthly, equal to $2.016 annually if that payment remains unchanged. At a recent net asset value of $18.37, a $7,000 investment would purchase 381 full units and produce approximately $768.10 per year.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | ANNUAL DIVIDEND | ANNUAL TOTAL PAYOUT | FREQUENCY | TOTAL INVESTMENT |
|---|---|---|---|---|---|---|
| HMAX | $18.37 | 381 | $2.016 | $768.10 | Monthly | $6,998.97 |
Reinvesting that income would purchase additional units, allowing future distributions to buy even more. This compounding effect can turn a high-yield position into a much larger income stream, although investors should remember that HMAX stock’s monthly payment can change.
Foolish takeaway
HMAX concentrates almost entirely on Canadian financial companies, leaving it vulnerable to credit losses, recessions, housing weakness, and regulatory changes. Covered calls can also sacrifice capital growth during strong markets, while distributions may include dividends, option premiums, capital gains, or return of capital.
Those risks make HMAX stock better suited to the income portion of a diversified portfolio rather than every available TFSA dollar. Investors should also understand how ETFs work before treating a high quoted yield like a guaranteed savings-account rate.
All said, HMAX stock combines Canada’s largest financial companies with a covered-call strategy built for monthly income. Investors comfortable trading some upside for bigger cash payments could use today’s roughly 11% yield to create more than $750 in annual TFSA income, then let those monthly deposits build a larger retirement paycheque over time.
