Ultimately, if you want income that’s significantly higher than what traditional dividend stocks offer, you should look to more advanced exchange-traded funds (ETFs).
Some of these funds use leverage and covered call strategies to increase cash flow beyond what the underlying stocks naturally produce. The trade-off is higher costs, more moving parts and greater downside risk.
So before you click buy, you need to understand exactly how these structures work.
How leverage and covered calls increase returns
The first tool is leverage. An ETF with a leverage of 1.25 means that for every $100 of investor capital, the fund borrows approximately $25 to invest a total of $125. This increases exposure to the underlying portfolio.
When markets rise, profits are magnified. When markets fall, losses are also magnified. Income from dividends and option premiums also scales up, but the additional borrowing means higher volatility and interest costs.
The second tool is covered calls. In a covered call strategy, the ETF owns shares and then sells call options against those holdings. By selling the option, the fund collects a premium in advance.
That premium becomes distributable income. The downside is that if the stock rises above the strike price, the upside is capped. You are trading some of the future growth for immediate cash flow.
Combine 1.25x leverage with covered calls and you get higher monthly payouts, but also limited upside and more sensitivity during market downturns.
Hamilton Enhanced US Covered Call ETF
The first ETF I like is Hamilton Enhanced US Covered Call ETF (TSX:HYLD), which currently pays a yield of 12.59%.
HYLD is a fund of funds that holds a basket of Hamilton’s YIELD MAXIMIZER ETFs. These underlying ETFs cover broad U.S. stocks and key sectors such as technology, financial services, healthcare, energy, gold producers and real estate investment trusts. The overall exposure loosely reflects the sector mix of the S&P 500, but with an income-oriented design.
HYLD applies covered calls to all its holdings and uses leverage of approximately 1.25 times. The result is a high monthly distribution yield that has recently hovered in the low double digits. Most of the expected return comes from cash distributions and not from price increases.
In strong bull markets, HYLD will likely underperform a regular S&P 500 ETF due to limited upside. In flat or moderately rising markets, stable option premiums can make the income profile attractive.
Hamilton Enhanced Canadian Covered Call ETF
To balance US exposure, you may consider Hamilton Enhanced Canadian Covered Call ETF (TSX:HDIV), which yields 10.55%.
HDIV focuses on Canadian equities and also uses a fund-of-funds structure built from Hamilton’s YIELD MAXIMIZER range. Given the structure of the Canadian market, sector exposure is heavily skewed towards financials, utilities, energy and gold.
Like HYLD, HDIV uses covered calls and leverage of approximately 1.25 times. This combination delivers high monthly distribution returns, usually in the double digits.
The trade-off is the same: less upside potential during strong rallies and greater downside potential during sharp corrections. Investors need to get comfortable with volatility and understand that total returns can lag behind an uncovered call benchmark during long bull cycles.
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