A Tax-Free Savings Account (TFSA) is one of the best tools Canadians have for building wealth because of its tax-free nature. If you have $25,000 to invest, a straightforward strategy is to build a portfolio of Canadian income-focused exchange-traded funds (ETFs). These funds provide instant diversification and regular cash distributions, making them an attractive option for investors seeking consistent cash flow without the need to select individual stocks.
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Start with core Canadian dividend ETFs
The Vanguard FTSE Canadian High Dividend Yield Index ETF (TSX: VDY) and the iShares S&P/TSX Composite High Dividend Index ETF (TSX: XEI) are excellent starting points for income investors. Both ETFs track diversified indexes of established Canadian dividend-paying companies and charge a relatively low management expense ratio (MER) of just 0.22%.
VDY has approximately $8.6 billion of assets under management (AUM) and holds about 60 stocks. As of the end of June, the fund had a price-to-earnings (P/E) ratio of 18.2, a price-to-book (P/B) ratio of 2.4, return on equity of 13.1%, and earnings growth of 9.6%. Nearly 61% of the portfolio is invested in financials and almost 27% in energy — two sectors that have delivered strong performance in recent years. Its largest holdings include Canada’s Big Five banks along with blue-chip energy leaders such as Enbridge and Suncor Energy. The ETF currently offers a yield of roughly 3%.
XEI takes a slightly broader approach, holding about 76 stocks. Its portfolio is spread across financials (31%), energy (30%), utilities (13.5%), and other sectors, reducing concentration risk. The ETF trades at a P/E ratio of about 17.8 and a P/B ratio of roughly 2.2, while offering a yield near 3.5%. Its largest holdings also include Canada’s major banks and infrastructure leader TC Energy.
Add real estate for greater diversification
Investors looking to diversify beyond banks and energy may also consider the iShares S&P/TSX Capped REIT Index ETF (TSX: XRE). The fund provides exposure to approximately 14 Canadian real estate investment trusts (REITs) spanning residential, retail, industrial, and office properties.
With approximately $1.2 billion in net assets, XRE currently offers a yield of around 4%. Its largest holdings include RioCan REIT, Granite REIT, and Canadian Apartment REIT. Although its 0.60% MER is higher than those of broad dividend ETFs, the added real estate exposure can enhance portfolio diversification and provide another dependable source of income.
Consider covered calls for higher income
For investors willing to trade some long-term capital appreciation for higher current income, the BMO Canadian High Dividend Covered Call ETF (TSX: ZWC) may be worth considering. In addition to holding a portfolio of approximately 40 Canadian dividend stocks, ZWC generates extra income by writing covered call options on part of its holdings.
This strategy has helped the ETF produce a recent yield of nearly 6.3%, making it an attractive choice for retirees and income-focused investors. The trade-off is a higher MER of 0.72% and lower upside during strong bull markets, but many investors find the enhanced income worthwhile.
Investor takeaway
A $25,000 TFSA can become a reliable source of tax-free cash flow by investing in a diversified mix of Canadian income ETFs. VDY and XEI provide a strong foundation of high-quality dividend stocks, XRE adds real estate exposure and diversification, while ZWC offers the potential for higher income through a covered-call strategy. Together, these ETFs can help investors build a simple, diversified portfolio designed to generate consistent cash flow over the long term.
