For investors looking to build a pension-like portfolio that can pay you monthly, starting with high-quality dividend stocks and REITs could be the way to go. Still, the frequency of dividend payments should matter far less than the price paid and the dividend growth trajectory.
For investors who want not only monthly payouts, but supercharged yields on some of the highest-quality dividend growers in the country, an equity ETF rather than a single stock could be a more tactile way to go.
Hamilton Enhanced Canadian Covered Call ETF
Enter shares of the Hamilton Enhanced Canadian Covered Call ETF (TSX: HDIV), which has a colossal 10.1% yield at the time of this writing, a monthly payout, and offers investors far more than just a broad basket of stocks. With a mild (25%) amount of leverage and a covered call strategy, the HDIV is definitely one of the spicier specialty income plays for investors willing to bear more risk for a shot at greater rewards.
So far this year, the HDIV is up around 12%. And that’s not even including the rich 10% distribution yield. When you consider the appreciation potential, it’s hard to ignore the ETF.
Of course, there’s no such thing as a free lunch in the investment world. Higher rewards tend to come with higher risks, and while the HDIV has been a market-topper, questions linger as to what could happen when the TSX Index eventually reverses course and falls into a bear market.
Indeed, the word “leverage” is enough to scare most investors. But when it comes to the HDIV, the 25% cash leverage is seen as an amount of leverage that sits in that “just right” spot for investors who understand what they’re dealing with.
A rather unique risk/reward
More leverage means more volatility, and while I haven’t personally embraced leverage, I do think that 25% is a relatively mild amount to jolt returns in bull markets while adding pressure in bear markets, but not enough pressure such that one gets into a boatload of trouble in a hurry.
At the end of the day, we’re not talking about 100%, 200%, or even 300% leverage (I wouldn’t dare take on 100%, let alone 300%) that investors might risk their shirt with. When you consider the steadier nature of Canadian dividend payers, I do think that the bit of leverage offered in something like the HDIV makes for a unique risk/reward profile that might better suit investors who do seek to crank up the risk/reward a bit, but not obscenely so.
When it comes to such covered call ETFs, especially ones with leverage, yield volatility (and uncertainty) can make budgeting in any given month that much tougher.
Bottom line
For those with a core portfolio of dividend-paying blue chips and the flexibility to handle that yield volatility, however, a small dose of the HDIV could make a lot of sense, especially given the benefits over traditional covered call ETFs with no leverage and their biggest shortcoming: capped upside.
Is mild leverage the solution to the capped-upside problem with covered call ETFs?
Possibly. But only for those with stronger stomachs on the way down. If you want to income-weight your total returns and get a tactile shot in the arm on the way up, perhaps there is no more intriguing play than the HDIV, especially considering the faster-paced ride it could offer relative to the TSX Index.