Retirees: How to Earn Tax-Free Income in 2023 to Supplement Your OAS and CPP Payouts

These two high-yielding ETFs can help retirees meet their retirement income needs.

| More on:

Canada has a fairly robust social security system in place compared with the U.S. With both Canada Pension Plan (CPP) and Old Age Security (OAS) payouts, retirees are assured at least a baseline standard of living throughout their golden years. The Canadian Retirement Income Calculator can help you estimate your income in your retirement years.

However, if you have a maxed-out Tax-Free Savings Account (TFSA) that has compounded over the years, you have the potential to significantly enhance your retirement income. Holding income-generating investments here can be a good idea given their tax-free treatment.

My exchange-traded fund, or ETF, picks today are designed to help retirees meet withdrawals without having to sell shares. Both of them also pay out monthly as opposed to individual dividend stocks, which pay quarterly. Thanks to their underlying assets and strategies, both ETFs also pay high yields.

iShares Canadian Financial Monthly Income ETF

The iShares Canadian Financial Monthly Income ETF (TSX:FIE) provides high monthly income potential via exposure to a variety of assets from the Canadian financial sector. This includes dividend stocks, corporate bonds, preferred shares, and income trusts.

Currently, FIE pays an annualized distribution yield of 6.96%. This is the percentage yield an investor can expect to receive annually if the most recent dividend remains consistent at the current share price. As noted earlier, FIE pays out monthly, which is good for those living off investment income.

Holding FIE will cost a management expense ratio (MER) of 0.84% per year. This is one of the downsides of the ETF. Compared to dividend ETFs or index ETFs, FIE is expensive. It’s also not the most diversified ETF given that all of its holdings come from the financial sector.

BMO Canadian High Dividend Covered Call ETF

A more diversified option might be the BMO Canadian High Dividend Covered Call ETF (TSX:ZWC), which holds dividend stocks from the energy, financial, utilities, telecom, and consumer staples sectors to name a few. The ETF enhances the yield from these dividend stocks by selling covered calls.

Basically, covered calls are options that convert the future upside potential of the ETF into an immediate cash premium. This premium is paid out on a monthly basis along with the yield from the dividend stocks. Currently, ZWC has an annualized distribution yield of 6.58%.

Personally, I like ZWC better than FIE as it has greater diversification. I’m not a fan of corporate bonds or preferred shares either due to their interest rate sensitivity. As a bonus, ZWC also charges a lower management expense ratio of 0.72%.

The Foolish Takeaway

Retirees looking for monthly income investments in their TFSA could use either ZWC or FIE to achieve higher-than-average yields. Neither of these ETFs is likely to see strong growth over the long term, but that’s not really a concern for retirees. As with all investments, ensure you diversify!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Dividend Stocks

exchange traded funds
Dividend Stocks

1 Top High-Yield Dividend ETF to Buy to Generate Passive Income

BMO Canadian Dividend ETF (TSX:ZDV) is a great income ETF for those seeking a safe but generous passive-income boost.

Read more »

ways to boost income
Dividend Stocks

TFSA Investors: 3 Dividend Stocks to Buy and Hold Forever

These dividend stocks are likely to consistently increase their dividends, making them attractive investment for your TFSA portfolio.

Read more »

how to save money
Dividend Stocks

Passive-Income Seekers: Invest $10,000 for $59.75 Monthly Income

Passive-income seekers can transform their money into monthly cash flow streams through dividend investing.

Read more »

happy woman throws cash
Dividend Stocks

2 Canadian Dividend Stars Set for Strong Returns

You can add these two fundamentally strong Canadian dividend stocks to your portfolio now and expect steady income and strong…

Read more »

Man in fedora smiles into camera
Dividend Stocks

Is it Better to Collect the CPP at 60, 65, or 70?

Canadian retirees can consider supporting their CPP benefit by investing in blue-chip dividend stocks with high yields.

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

2 TFSA Stocks to Buy Right Now With $3,000

These two TFSA stocks are perfect for those wanting diversification, long-term growth, and dividends to boot!

Read more »

The TFSA is a powerful savings vehicle for Canadians who are saving for retirement.
Dividend Stocks

TFSA: The Perfect Canadian Stocks to Buy and Hold Forever

Utility stocks like Canadian Utilities (TSX:CU) are often very good long-term holds.

Read more »

ETF stands for Exchange Traded Fund
Dividend Stocks

How to Use Your TFSA to Create $5,000 in Tax-Free Passive Income

Creating passive income doesn't have to be risky, and there's one ETF that could create substantial income over time.

Read more »