1 Top High Yield Dividend ETF to Buy to Generate Passive Income

One of the most important aspects of investing is making sure your money is diversified enough to reduce as much risk as possible. That’s why exchange-traded dividend funds (ETFs) are some of the best high-yield investments passive income investors can buy.

Not only does owning a portfolio of dozens of dividend stocks require a lot of work and research to keep up, but often the highest-yielding stocks are also among the riskiest.

And when you try to diversify your investments, you obviously lower your overall risk, but you also typically lower your average return as you add more stable companies that don’t pay as much.

That’s why one of the best options investors have is a reliable high-yield dividend ETF. This way you get exposure to a basket of stocks, reducing the amount of research you need to do and increasing the diversification of your portfolio, while still providing you with attractive returns.

So if you want to boost your passive income today with a top high-yield dividend ETF, here’s why BMO Canadian High Dividend Covered Call ETF (TSX:ZWC), is one of the best to consider.

Covered call ETFs are top choices for dividend investors

ZWC ETF is one of the best high-yield dividend ETFs you can buy, both because of the stocks it offers exposure to and the covered call strategy it uses.

First, the ETF invests in top companies operating in key sectors such as banking, telecommunications, infrastructure, energy and utilities.

Some of the top stocks include Bank of Nova Scotia, Enbridge, Manulife, Canadian National Railway and much more. These are all the highest quality and most reliable dividend growth stocks on the TSX.

In addition to the high-quality companies it offers exposure to, because it uses a covered call strategy, the dividend ETF typically offers an attractive yield, currently above 6%.

What is a covered calling strategy and why is it ideal?

Simply put, a covered call strategy is essentially a way to earn additional income from stocks you already own. The ETF will therefore sell call options on the shares it has in its portfolio. When it sells these options, it collects a cash premium, and that money is paid out to investors as part of the ETF’s distributions. That’s why it can provide such a significant return.

However, in exchange for that extra income, the dividend ETF gives up some of the capital gains potential if the stock rises quickly in a short period of time. That’s why these funds are so ideal for passive income seekers.

However, the ZWC ETF is not only ideal because it offers high returns; it is actually one of the best investments to buy in this area.

Right now, many of the best Canadian stocks are already trading near their 52-week highs, so an ETF that hedges some upside potential isn’t much of a downside. With valuations under pressure, you won’t be giving up big rallies anyway, which makes the higher income from a covered call approach a lot more attractive.

It is worth noting that the ZWC charges a rate of 0.72% management expense ratio. However, with a current yield of over 6% you are still achieving a return of approximately 5.3%.

So if you’re looking for a high-quality dividend stock or ETF to buy now, ZWC is easily one of the best choices investors have today.