Written by Adam Othman at The Motley Fool Canada
There are plenty of options for starting a passive income, but the most common one for retail investors is perhaps dividend stocks. But now, when ETFs are becoming more mainstream and popular than individual stocks, it’s only natural that they will start competing with dividend stocks in the passive-income space.
That becomes even more likely when you look at the inherent diversification advantage of the ETFs. Each ETF (a basket of securities) is essentially a pre-made dividend portfolio. And there are two that you might consider starting with.
An options-oriented ETF
Not all ETFs are as straightforward as putting a group of securities together or simply tracking the performance of an index. Some follow a relatively complex (and actively involved) strategy, like BMO US Put Write ETF (TSX:ZPW). This ETF was specially created to offer an “alternative income exposure” to its investors.
The strategy this ETF follows is highlighted in the name: a part of the BMO global asset management team writes put options for some large-cap U.S. companies to generate income for the fund’s investors. This has one positive and one negative consequence. The positive is the relatively high annualized distribution yield, which is currently at 8.2%.
The downside is that the value of the ETF is almost in a permanent state of decline, at least it has been since its inception in 2015. But the monthly distribution and a high yield make up for it. Another slight downside is the relatively high MER of 0.72%, but it’s justified considering the active nature of this ETF’s management. It carried a low- to medium-risk rating (two on a scale of five).
A healthcare ETF
Healthcare is essentially an evergreen industry, but for Canadian investors, creating a dividend portfolio out of healthcare companies is a challenging endeavour. The primary reason is that the Canadian healthcare sector is dominated by marijuana companies, almost none of which pay dividends. And even among the rest of the sector, there are precious few suitable dividend options.
This makes Evolve Global Healthcare Enhanced Yield ETF Hedged (TSX:LIFE) an attractive option on two fronts. Not only is it a healthy dividend/distribution option thanks to its healthy 6.67% distribution yield (quarterly distribution frequency), but it also has exposure to a decent basket of healthcare assets.
It follows a Solactive index and comprises 20 almost equally weighted securities from seven countries though around 60% are from the United States. It includes many well-known names like Johnson & Johnson and GSK.
Two more factors that favour this dividend ETF are its slightly lower fee compared to the other (an MER of 0.45%) and its performance. It’s not a powerful grower, but it can keep the value of your capital invested in the ETF above the inflation line.
When you are on the horns about investing in stocks or ETFs for dividends, it’s a good idea to keep the relevant strengths of both assets in mind. They both have pros and cons, and one option is not inherently better than the other. You have to keep your passive income and broader investment goals in mind before making a choice.
Our team of diligent analysts at Motley Fool Stock Advisor Canada has identified one little-known public company founded right here in Canada that’s at the cutting-edge of the space industry and recently completed a transformational acquisition, all while making a handsome profit in the process!
The best part is that in a market where many stocks are selling at all-time-highs, this stock is trading at what looks like a VERY reasonable valuation… for now.
Fool contributor Adam Othman has no position in any of the stocks mentioned. The Motley Fool recommends Johnson & Johnson.