Want a high monthly investment income? Buy these Canadian ETFs
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Income-oriented investors have traditionally used a combination of global bond funds and dividend-paying Canadian stocks to provide a stable cash flow to draw upon during retirement. The goal here is to meet living expenses by using distributions as much as possible, without taking out too much capital.
Therefore, an income-oriented retirement portfolio should offer high returns, with monthly distributions paid annually. This can be more difficult with dividend stocks that pay quarterly and rarely have yields above 4%. Fortunately, black rock has excellent exchange-traded funds (ETFs) that fill that gap. We’ll take a look!
Preferred shares to the rescue
Our first ETF, iShares S&P/TSX Canadian Preferred Share Index ETF (TSX: CPD), provides exposure to a diversified portfolio of Canadian preferred shares. Simply put, a preferred stock is a hybrid security with characteristics of both stocks and fixed income securities.
Preferred shares are shares of the company with dividends that are paid to shareholders before common stock dividends are issued. If the company goes bankrupt, the preferred shareholders have the right to be paid out of the assets of the company before the common shareholders.
Most preferred stocks have a fixed dividend, unlike common stocks. Preferred shareholders generally hold no voting rights. Notable preferred shares of this ETF include those of TC Energy, Canadian Imperial Bank of Commerce, Enbridge, Bank of Montreal, Royal Bank of Canada, and Fortis.
CPD has a total of 221 holdings and a current annual distribution yield of 4.10% paid monthly. On a $1,000,000 retirement portfolio, this equates to $41,000 in annual dividends paid. CPD will cost you a management expense ratio (MER) of 0.06% to hold, which is at an all-time low.
Corporate bonds are good too
Our second ETF, iShares Canadian Financial Monthly Income ETF (TSX:FIE), increases CPD with the addition of corporate bonds and income trust units, primarily those from the Canadian financial sector.
The current FIE has a total of 28 holdings, with a higher payout yield of 5.65%. On a $1,000,000 retirement portfolio, this equates to $56,500 in annual dividends paid. FIE will cost you an MER of 0.82% to hold, which is significantly higher than CPD, but understandable when you look at its composition.
In addition to holding CPDs, FIE also holds a corporate bond index and the common stocks of numerous financial sector companies outside of the Big Six Banks, including Manulife, Electric company, and sun life.
The combination of preferred stocks, corporate bonds and common stocks gives FIE better potential for capital appreciation while providing a very respectable return on income.
The insane takeaway
FIE and CPD can be attractive to income-oriented investors. However, we should be aware of a few important risks if we buy and hold any of these ETFs:
- Interest rate risk: The price of bonds (and, to a lesser extent, preferred stocks) is inversely proportional to interest rates. When interest rates rise, the price of these assets falls, while their yields rise.
- Concentration risk: both ETFs are heavily invested in the financial sector (FIE) and/or in the energy sector (CPD). These sectors are often cyclical and can be prone to episodes of underperformance.
If I had to choose, I would choose the FIE. Despite its much higher MER, the benefits of diversification are better. Having a well-balanced portfolio of not only preferred stocks, but also corporate bonds and common stocks offers the potential for capital appreciation in addition to stable monthly income.