High Dividend ETF Canada

WOWA Simply Know Your Options

Data from morningstar.ca as of 6 November 2022.

When investing in the stock market, one can adopt various investment styles. Growth investing is focused on companies which are likely to grow very fast. Value investing is focused on investing in companies trading well below their intrinsic value. Dividend stock investing is focused on companies that pay out sizable dividends.

A dividend investor is interested in companies with high dividend yields. But care must be exercised to avoid a dividend yield trap. A dividend yield trap refers to a scenario where one invests in a stock with a high dividend yield but soon after faces a cut in the dividend. To avoid falling into a dividend yield trap, one should consider the sustainability of the dividend payments.

To investigate the sustainability of the dividend, one might look at the dividend payout ratio. A high payout ratio is a sign that the dividend is likely unsustainable. But a reasonable dividend payout ratio does not guarantee dividend sustainability because adverse developments in a company's position are likely to show themselves in the stock price before financial statements.

During the Covid pandemic and after the 2008 financial crisis, western central banks, including the federal reserve, European Central Bank, Bank of England, Bank of Japan and Bank of Canada, engaged in financial repression. They artificially suppressed interest rates so that safe fixed-income assets (bonds) virtually earned nothing.

As a result, some investors had to substitute dividend funds for bond funds and dividend stocks for bonds. But over the past year, inflation reached levels not seen in 40 years. This rise in inflation forced all major central banks except the Bank of Japan to raise interest rates. As a result, most assets, including dividend ETFs, have been repriced.

Interest rate affects asset prices because the financial value of any asset is a result of that asset’s ability to generate cash flow. More specifically, the value of any investment is the present value of the cash flows that the investment will generate. Future money is less valuable than present money. As a result, money that will be received in the future should be discounted to its present value.

The appropriate discount rate would depend on the certainty of future cash flows. A risk-free interest rate is used as the discount rate for a security that provides guaranteed future payments, like a 10-year bond, a 5-year bond, or a Canada savings bond. A risk premium should be added to the risk-free rate for securities that do not guarantee future cash flows.

At the top of this page, there is a list of 14 Canadian ETFs with the highest dividend yields at the time of writing. More information is provided about the top 10 of them below.

Data from morningstar.ca as of 6 November 2022.

As its name suggests, this fund invests in US companies active in the technology sector. It offers quarterly dividend distributions. This is an actively managed fund which strives to invest in more than 25 very large tech companies which are listed on a North American stock exchange. This fund strives to reduce its volatility and enhance its returns by writing and selling call options on its holdings. This strategy would increase the fund's income in exchange for limiting the upside which could be realized. This fund has had a very rough year because of the rising interest rates. Rising rates have caused steep declines in the tech sector stock prices.

Data from morningstar.ca as of 6 November 2022.

ATSX is an interesting combination of an index fund and a hedge fund. It is mainly holding S&P/TSX 60 index. It overlays smaller long and short equity positions on top of its main holding, the S&P/TSX 60 index. An attractive point about this fund is that management is so confident in its performance that instead of a management fee, it charges a performance fee. Management would claim half of the fund's return, which is made above the total return of the S&P/TSX 60 index.

As of October 31.

Data from morningstar.ca as of 6 November 2022.

GLCC invests in the Solactive North American Listed Gold Producers Index, which consists of large North American gold miners. It writes out-of-the-money call options on its holdings to generate some extra return. This fund was formerly called Horizons Enhanced Income Gold Producers ETF and traded with the ticker symbol HEP. GLCC distributes its dividend and call option income every month. As you would expect, the unit price of this ETF is strongly correlated with the price of gold.

Data from morningstar.ca as of 6 November 2022.

TXF.B is the same as TXF, with one difference. Investing in TXF.B is like exchanging your CAD for USD and using the USD to buy tech company shares. In this case, you can enjoy capital gains either from an appreciation in underlying stock prices or from an appreciation in USD vs. CAD. Investing in TXF is like using your CAD as collateral to borrow USD. Then you buy tech company stocks. In this case, you are only concerned with the performance of underlying stocks and fluctuations in USD vs. CAD would not affect your return.

Data from morningstar.ca as of 6 November 2022.

ENCC invests in equities underlying the Solactive Equal Weight Canada Oil & Gas Index. It sells out-of-the-money call options on its holding to increase its return and reduce its volatility. ENCC distributes its income from dividends and call options every month. It was formerly called Horizons Enhanced Income Energy ETF and traded under the ticker symbol HEE.

Data from morningstar.ca as of 6 November 2022.

Treasury Inflation-Protected Securities (TIPS) are bonds issued by the US government. TIPS have a fixed coupon rate which is paid semi-annually. Their principal is adjusted by the CPI level semi-annually. This adjustment in the principal causes the interest payments to increase with inflation. When your TIPS matures, you would receive the inflation-adjusted principal or the initial face value of the bond, whichever is greater.

Data from morningstar.ca as of 6 November 2022.

Data from morningstar.ca as of 6 November 2022.

Data from morningstar.ca as of 6 November 2022.

Data from morningstar.ca as of 6 November 2022.