If I had $35,000 or so worth of cash just sitting around in a TFSA (Tax-Free Savings Account) portfolio and wanted to put that sum to work in higher-yielding investments, I do think that a mix of income ETFs, REITs, and hard-hit dividend stocks could be the move. Of course, everyone’s preference for the kinds of stocks and REITs to include will differ.
But, for the most part, I still think that the current environment is rich with opportunities for passive income investors who are willing to take on more risk while settling for below-average capital gains. When it comes to scoring high yields, it doesn’t get much easier than reaching for those covered call ETFs, many of which offer yields north of 8%. As always, though, there’s a catch.
These income-oriented ETFs do not come cheap, with MERs (management expense ratios) that tend to exceed 0.5%. That doesn’t feel huge, but over time, it can make a pretty big dent in your total returns. While I’m not against covered call ETFs for those who need their capital to go a bit further, especially as inflation continues to stick around for the rest of the year, I do think that finding the perfect mix between growth and income is the move for investors who plan to stay invested for more than five years.
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It’s about more than just yield
Upfront yield gets all the attention from income investors, but dividend growth and capital appreciation, I believe, are just as important, if not more so, than what you’ll receive every month or quarter.
When it comes to monthly dividends (or distributions), it’s tough to top the Canadian REITs. Many of them have higher yields by design, and while they are a bit more sensitive to interest rate increases, given their capital-intensive nature, I do think that the Bank of Canada (BoC) will stay on hold for a while before it has a reason to reduce interest rates. Indeed, a central bank that’s reluctant to raise rates, especially with hints of softness in employment, I think, bodes very well for the higher-yielding REITs and some of the more capital-intensive dividend payers out there.
In terms of how to score $200 per month on $35,000 in invested principal, TFSA investors are going to need to shoot for a dividend yield that’s just shy of the 7% mark. Such high-quality dividend payers are few and far between on the TSX Index. If you’re willing to go down the REIT route, though, there are plenty of intriguing options to consider.
For the most part, 7% is the farthest I’d stretch for yield.
Slate Grocery REIT
Slate Grocery REIT (TSX: SGR.UN) stands out as a fantastic high-yield REIT to consider, with its yield slightly above 7%. Over the past two years, the REIT, which owns grocery store-anchored properties in the U.S. market, has gained more than 45%. That’s seriously impressive, even if the rally was only reclaiming the ground lost in previous years.
For investors who want the added stability, the grocery-anchor, I think, is what makes Slate so intriguing. Grocery stores bring in major foot traffic, and seeing as many of Slate’s tenants are necessity-based retailers, it feels like Slate’s tenant base has what it takes to weather tough times without risking missing a month’s rent. For investors, there’s peace of mind with such a defensively-tilted REIT.
While I wouldn’t plow $35,000 into a single REIT, I do think that Slate acts as an example of the types of investments that can help investors achieve a level of monthly passive income without having to risk one’s shirt or overpay in fees. When combined with a few other quality yielders and perhaps a covered call ETF, I do think $200 per month on $35,000 is very much possible without having to run into serious trouble.
