The best five-year Guaranteed Investment Certificate (GIC) rates in Canada currently top out around 4.1%. An investment yielding 11.1% could produce nearly three times the annual income. The extra cash sounds delightful, although the financial universe hasn’t suddenly begun handing out free dessert.
A GIC promises a stated return when held to maturity. Eligible GIC deposits at a Canada Deposit Insurance Corporation (CDIC) member institution can also receive protection up to $100,000 per insured category, including principal and interest.
That security explains the lower rate. Many GICs lock away the principal, while interest may arrive annually or at maturity. Investors wanting substantially more income must accept substantially more risk. Funny how those two keep arriving together.
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Where the extra income comes from
Covered-call funds provide one alternative. They own stocks and sell options that give another investor the right to purchase those stocks at an agreed price. The option premiums supplement the portfolio’s dividends, allowing the fund to make larger distributions.
The tradeoff is limited upside. If the stocks soar beyond the option price, the fund may surrender part of the gain. Unit prices and distributions can also fall, unlike a properly held GIC. Understanding that exchange is an important part of learning how exchange-traded funds (ETFs) work.
HMAX
Hamilton Canadian Financials Yield Maximizer ETF (TSX: HMAX) provides the eye-catching income in this headline. Technically, HMAX stock pays a distribution rather than a pure dividend because the money can include stock dividends, option premiums, capital gains, and other tax components.
The ETF owns 10 large Canadian financial companies. Banks represent 76.9% of the portfolio, while insurers and asset managers provide the remainder. Royal Bank and Toronto-Dominion Bank alone account for approximately 43% of the fund, so this is diversification with a distinctly Canadian-bank accent.
HMAX stock then writes covered calls to increase income and reduce volatility without using leverage. The strategy can perform particularly well when bank stocks rise gradually or move sideways, allowing investors to collect dividends and option premiums without borrowing additional money.
The income math
The economic backdrop could help. The Bank of Canada held its policy rate at 2.25% in July and said Canadian growth was improving while inflation should ease. A steadier economy may support loan growth and credit quality across HMAX’s bank holdings.
HMAX stock recently declared a $0.168 monthly distribution. That annualizes to $2.016 per unit and produces an approximately 11.1% yield at the recent $18.20 price. A $7,000 investment would purchase 384 full units and generate approximately $774.14 annually, averaging $64.51 per month. The same invested amount earning 4.1% in a GIC would produce roughly $286.54 annually.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | ANNUAL DIVIDEND | ANNUAL TOTAL PAYOUT | FREQUENCY | TOTAL INVESTMENT |
|---|---|---|---|---|---|---|
| HMAX | $18.20 | 384 | $2.016 | $774.14 | Monthly | $6,988.80 |
Foolish takeaway
All that said, it’s not a replacement for a GIC. HMAX stock’s distribution can change, and its unit price can decline during a banking crisis, recession, or credit downturn. Covered calls may also cause it to trail bank stocks during a powerful rally. Its latest disclosed ETF expenses totalled 0.92%, another cost a GIC doesn’t carry.
Investors shouldn’t use HMAX stock for money needed safely next year. It makes more sense as the higher-income portion of a diversified portfolio containing other sectors, growth investments, and Canadian dividend stocks.
HMAX stock decisively beats current GIC rates on income, although it can’t match their certainty. For investors able to tolerate market swings, that risk could turn a modest investment into a considerably larger monthly paycheque.
