An ETF for Dividends & Covered Calls holding Large Canadian Companies
By Harvest ETFs
Dividends might just be a key factor explaining some of Canadian investors’ “domestic bias.” As is often proclaimed by op-eds and factsheets, Canadian stocks represent between three and four per cent of global market capitalization, but Canadian investor portfolios are often far more heavily invested in domestic companies.
While our domestic bias is likely due to a range of factors, from market share to tax and currency considerations to personal familiarity, it’s worthwhile to note that some of Canada’s largest and most well-known companies tend to pay high dividends. These equities have also offered dependable returns over the last half decade. That is reflected in the overall returns of the S&P/TSX 60. Taking a 5-year time horizon on the index from January of 2019, price return alone nets out at 6.69%.
The dividends paid by some of Canada’s largest companies are all the more appealing given the federal dividend tax credit, which can offer a tax break on dividends paid by taxable Canadian corporations.
The case for Canada seems relatively strong. Large-cap companies with dividend track records, often exposed to some defensive sectors. That’s a value proposition neatly encapsulated by the Harvest Canadian Equity Income Leaders ETF (HLIF:TSX).
An ETF for Canadian leaders, dividends, and covered call options
HLIF is an ETF designed to generate income and create the opportunity for returns from a portfolio of large-cap Canadian dividend payers. It holds 30 Canadian companies, screened by market cap and dividend payments. These are companies like Enbridge, Royal Bank, and TELUS. They tend to have dominant market shares in their industries and a long track record of creating shareholder value.
The ETF holdings’ already high dividend yields are amplified further by the application of Harvest ETFs’ active & flexible covered call options strategy. The ETFs’ portfolio managers sell call options on a flexible percentage of HLIF’s holdings, with a maximum limit of 33%, trading off some market upside opportunity for a higher annualized yield and the ability to monetize market volatility. The result is an income yield of 7.92% as at January 25th, 2024.
HLIF’s ability portfolio makeup could also be attractive for investors anticipating interest rate cuts in 2024. Rate cuts encourage investment and have the potential to lure investors back into the arms of some of Canada’s top blue-chip equities. HLIF’s tilt towards Financials, Energy and Utilities—the three largest subsectors in the ETF—and its focus on large-cap companies makes it an ETF to consider for investors who expect the Bank of Canada (BoC) to move forward with rate cuts in 2024.
Those seeking an even higher income yield could also consider the Harvest Canadian Equity Enhanced Income Leaders ETF (HLFE:TSX). That ETF invests directly in HLIF and applies a roughly 25% leverage component to generate a higher yield. You can learn about Harvest ETFs’ Enhanced Equity Income strategies here.
The case for Canadian equities inside a globally diversified portfolio looks strong. Dividend payers are already popular, and Canada’s leading companies enjoy significant market shares. By focusing on large companies and increasing overall yield with a covered call strategy, HLIF and HLFE offer Canadians exposure to the leaders of their domestic market plus high monthly cashflow.
Disclaimer
Commissions, management fees and expenses all may be associated with investing in Harvest Exchange Traded Funds (managed by Harvest Portfolios Group Inc.). Please read the relevant prospectus before investing. The funds are not guaranteed, their values change frequently, and past performance may not be repeated. The content of this article is to inform and educate and therefore should not be taken as investment, tax or financial advice.
