Which Canadian Dividend ETFs Pay the Most Right Now?

By Joey Frenette at The Motley Fool Canada

If you’re in need of more passive income (and, really, who couldn’t use an income boost amid inflation and the potential for further inflationary threats to cause the price of everything to keep rocketing higher over the foreseeable future?), perhaps it’s worth checking out some of the Canadian dividend exchange-traded funds (ETFs) out there with yields that are on the higher end of the range (in other words, a bit more than 4%).

Of course, you could just simply stock-pick your way to a higher yield for your Tax-Free Savings Account (TFSA), Registered Retirement Savings Plan (RRSP), or anywhere else. But unless you’re willing to put in the homework, especially when it comes to the state of the balance sheet and the free cash flows to be expected over the next two to four years, I’d much rather diversify when it comes to the dividend heavyweights with yields significantly above the 3% mark.

Indeed, with the bank rally in the rearview and energy stocks in a rather heated spot amid mounting geopolitical tensions this September, 3% (maybe even a bit less than that) may very well be the new 4%.

Canadian dividend ETFs to beat inflation?

For investors worried about higher prices at the grocery store, electronics store, the pump, and pretty much everywhere else, including the realm of digital services, a 3% yield might not be enough. But before you venture into the ultra-high-yield end of the waters, I think that diversification, especially with an income ETF, could be a friend of investors knowingly looking to take on more risk for fatter dividend payments.

While I’m not a huge fan of giving up more than 0.25% (think management expense ratios, or MERs, that are taken off the top of your returns every year), I do think that the price of admission is worth it when it comes to the higher-yielders. Why?

You’re getting broad diversification across numerous high-yield names, many of which also might screen for more than just the payout (think quality and valuation). If a single holding cuts its dividend, you won’t feel it nearly as much. Additionally, those quarterly payouts are turned into a monthly payout with passive income ETFs. Given that the frequency of payment matters just as much as yield does, I’d argue that it’s more than worth it to consider a one-stop-shop kind of solution. Last but not least, some specialty income ETFs provide a layer of added income from covered call-writing strategies, which trade off capital gains potential for an income boost.

Covered call ETFs for the jolt?

For income fans, I think it could make sense to go the route of covered call ETFs, even though MERs tend to be even higher. As for mild cash leverage (I’m talking 25% or less, not 2x or 3x leveraged ETFs that you’re sure to hear about in those televised ads), I’d look to steer clear unless, of course, you understand the added volatility

So, which Canadian ETF sports a hefty yield?

In my view, the Hamilton enhanced and covered-call ETFs take the crown these days. Hamilton Utilities Yield Maximizer ETF (TSX: UMAX) has a yield that stands at a towering 13.41% at the time of writing. It pays monthly and makes use of the covered call strategy that income investors should be familiar with by now. Of course, some yield volatility is expected when it comes to such ETFs.

What’s most impressive about the UMAX, which invests in pipelines, telecoms, yield-rich utilities, and more, is that it doesn’t use leverage. Not even a little bit. If you’re fine with an income-first ETF that bets on a broad range of securities, with covered calls added on top, I think the UMAX could help income investors get the jolt in a climate where yield is getting harder to come by.

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