And while it’s nicer to let interest rates do more of the heavy lifting for total returns, I think dividend growth and stability are undervalued qualities, especially for retirees who may be more attracted to interest rates than the underlying business fundamentals. Indeed, you should first invest in shares for the company, rather than investing for the return, and hope that everything turns out for the better.
Either way, building a portfolio of high-yield stocks can be tricky, especially for companies with questionable balance sheets. For passive income investors looking to earn higher returns through an exchange-traded fund (ETF), there are intriguing covered call options available, which don’t necessarily increase downside risk.
But of course there are tradeoffs, and covered calls come with the risk of missing out on potential capital gains. A hedged benefit is never great, especially if you’re aiming for superior total returns over time. But there is a class of higher growth covered call ETFs that can offer more growth potential and higher returns.
Here’s a growing covered call ETF with huge yields
In this piece, we’ll take a look at an interesting covered call ETF that is yielding a sky-high 10% at the time of writing. Of course, the return can fluctuate considerably in a given month. But if you’re comfortable with covered calls and want more returns instead of upside potential, an ETF is like Hamilton Enhanced Canadian Covered Call ETF (TSX:HDIV) could be worth keeping an eye on in the new year.
What’s going on with the HDIV ETF? The ETF bets on a broad basket of Canadian sector ETFs, many of which offer high returns. Additionally, the ETF stacks on covered call premium income, which provides a more attractive return, but at the cost of call option-induced upside capitalizations. With generous monthly payouts and the potential to do well in flat markets (the TSX Index will need a breather after shockingly good gains in 2025), the HDIV stands out as a must-watch, at least for the income-oriented investor.
Additionally, the ETF offers greater growth potential than other covered call ETFs, thanks in part to its 25% cash leverage.
Could that be a way to minimize the impact of a hedged upward move?
Maybe. But leverage tends to increase risk and volatility, and for many investors, raising the bar on risk is not the way to earn greater returns. That said, the 25% leverage is much less than the two or three times leverage ETFs (way too much leverage) that many investors may be more familiar with. While 25% isn’t an obscene amount, leverage is leverage, and it can make down markets a little more painful to deal with if you’re not used to choppy waters.
The bottom line
Either way, the HDIV is a riskier covered call ETF, but certainly more growth, especially in rising markets. Over the past year, the shares are up almost 20%, which has absolutely crushed the performance of most other covered call ETFs. It won’t be the right choice for more conservative income investors, but it certainly brings a unique strategy, with 25% leverage slightly increasing the risk/reward scenario.
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