Creating retirement income with 3 income ETFs

When you work with people who are retired or about to retire, one of the most popular questions I hear over and over again is HOW CAN I CREATE MORE INCOME from my investments?

It’s a big challenge today for retirees to invest money in such a way that they can achieve decent returns, create regular income without taking a lot of risk. With interest rates as low as they are, almost every retiree I meet is trying to find ways to increase yield and returns with the least amount of risk possible.

Although I am not personally retired myself, I am a fan of investments that create income. When I look for investments, I am part of the camp that believes in low cost, passive indexing with the occasional rebalancing mechanisms. If I can find investments that also produce income or yield, I tend to be attracted to investments like REITs, Dividends or Income producing options.

In the past, I have been pretty candid in sharing some of the investments that I own because it is a question I get all the time (What do you invest in?). Because I am not licensed to sell investment securities or ETFs, I will simply share with you the 3 ETFs that I own to create monthly passive income and why I own them.

Disclaimer: While this may sound obvious, I don’t think it hurts to let you know that just because I own these monthly income producing ETFs, it does not mean you should too. Please do some of your own research and I have added some links throughout the article to help you with your own research. In the comments below, share with other readers what you invest in for income?

Real Estate Investment Trust: BMO Equal Weight REITs Index ETF (ZRE)

I really love this investment. The NAV has been extremely consistent and the distributions have also been more consistent. Although I do not need the income, I like that it gets paid to cash and I can then deploy or reinvest the distributions from time to time.

I hold this investment in all my accounts (RRSP, TFSA and non-registered). I have a significant part of my overall net worth in hard Real Estate assets but this allows me to diversify into different types of real estate that I would not normally be exposed to like commercial, industrial and apartments.

  • Asset and Geographical Allocation
    • 100% Canadian
    • 100% Real Estate
      • 25% residential
      • 75% commercial (retail, office, industrial, etc.)
  • MER = 0.61%
  • NAV
    • Original price per share = $15 (May 19, 2010)
    • Highest price = $23.80 (March 28, 2019)
    • lowest price = $14.555 (May 20, 2010)
  • Distribution
    • Monthly
    • The yield has been over 5% for most of the time I’ve invested in this ETF.
    • I would say my average yield has been about 5.25%
    • Currently, with high share prices, the yield has dropped to about 4.5%
    • Distributions have been incredibly consistent at about 8.5 cents per share each month

Dividend ETF: iShares High Dividend ETF (XEI)

Because I have a lot of exposure to real estate through my REIT and my direct real estate holdings, I feel it is important to diversify a little into different asset classes. I still like yield and income so a Dividend ETF is appealing to me. I also think a dividend ETFs would be appealing for those that are retired, looking for ways to create a retirement portfolio for income. 

When it comes to Dividend ETFs, there is a lot more variety than in the REIT category. With more choice, it’s can also be a little more difficult to choose a clear winner. When selecting a dividend ETF, I looked at a number of different things but my priority (right or wrong) was to look for a competitive yield and low MERs.

  • Asset, Geographical and Sector Allocation
    • 100% Canadian
    • 30% exposure to energy and financial sector (total 60% in 2 sectors)
    • 10% exposure to Utilities, Real Estate and Telecommunications (total 30% in these 3 sectors)
    • 90% of the portfolio is in 5 sectors
  • MER = 0.2%
    • One of the lowest in the category
    • MERs in this category range from 0.18% to as high as 0.6%
  • NAV
    • When I look at XEI, I think of the average price at about $20 per share. There have been times where it’s higher and times when it’s lower
    • Highest price = $24.05 (September 3, 2014)
    • Lowest price = $16.41 (January 19, 2016)
    • The NAV is definitely a little more volatile than the BMO REIT in terms of the highs and lows but that is because stocks are more volatile than real estate. 
  • Distribution
    • Although Yield is not the end all be all, one of the features I like about this ETF is the yield has been consistently over 4%
    • Most dividend ETFs have a yield under 4%.
  • Other resources on dividend ETFs

Diversified Income ETF: iShares Diversified Monthly Income ETF (XTR)

For the same reason I added a Dividend EFT to my REIT ETF, I wanted to diversify a little further into other asset classes.

I still wanted to keep with the goal if finding an ETF that created monthly income so this diversified income ETF fit my wants.

  • Asset and Geographical Allocation
    • Approximately 50% equities and 50% fixed income
    • 75% Canada, 20% US and 5% other
  • MER = 0.62%
  • NAV
    • April 19 price per share = $11.06
    • Historical Low = $6.98 (March 6, 2009)
    • Historical High = $16.04 (August 9, 2006)
    • Since 2010 the pricing has kept in a pretty consistent trading band between $10 and $12
  • Distribution
    • Monthly distribution
    • From 2010 to 2015, the distribution has been steady at 72 cents per share (6 cents per month per share)
    • The distribution was cut to 60 cents per share in 2016 (5 cents per month per share)
    • The yield on distributions has been between 5% and 6% since 2010
  • https://www.blackrock.com/ca/individual/en/literature/etf-summary/xtr-facts-en-ca.pdf

When I look at my REIT ETF compared to my dividend ETF, I must admit I like my REIT ETF a little better. The MER is higher but the yield has been consistently higher with less volatility

This is why I added a third income ETF to my portfolio which is more diversified. Diversified by asset class and geographic region.

I like how these 3 income ETFs compliment each other but still produce regular income with a decent yield.

How to buy these investments?

If you want to structure a similar portfolio, my suggestion is to sign up with Questrade as they allow you to buy ETFs commission-free. You will still pay commissions when you sell, but not paying commissions when you purchase ETFs allows you to make regular contributions without the drag of fees on your portfolio.

What do you invest in to create income from your investment portfolio?

Comments

  1. Hitesh

    Are there any US $ ETF generating similar dividend income that you can recommend?

    • Jim Yih

      Sorry but I don’t own any myself. Anyone else have experience with US$ income ETFs?

      • Bernie

        Yes, I hold ETFs “ZWA” & “ZWH” for U.S. exposure and income in my RRIF. They are Canadian domiciled but contain U.S. stocks. I prefer to receive the income in $CAD but there are $USD version available.

        I also hold U.S. domiciled ETF “HTD”, CEFs “PDI” & “BME” and REIT “O”.

        All of the above pay excellent income and have performed well for me.

  2. liz

    I have put $ into a direct investing account with my bank. My question is – I have money in a reg direction investing account and I am wondering how to put the ETFs I buy into a TFSA? I enquired but it sounded as though moving $ out of the DI account would count as income? I guess waht I want to do is buy FTE’s deposit into a TFSA within Direct investing.

    • Liz

      I am sorry I missed all the typos – cash is in a direct investing account, but I am confused as to how to get the money into a TFSA within the direct investing account – I want the money to be in ETF’s within a TFSA. Does anyone have any advice to help me please?

      • wendi

        If both the direct investing account and the TFSA are held in the same brokerage or bank, I would just transfer the ETFs “in kind”. If the TFSA is held in a different brokerage, get them to initiate the transfer.

        If you have made capital gains on the ETFs in your investing account, you will have to pay tax on the capital gains when you pay your 2019 taxes. If you do your taxes yourself, you should become acquainted with the calculation of the ACB (adjusted cost base) – or your tax preparer can do this for you if you have one. If you have capital losses, you don’t have to pay capital gains tax, but you will want to save these credits for when you do.

        • Davie215

          Wrong. No capital losses are available for in-kind transfers into a TFSA. You must sell the asset in a non-reg account first and re-buy the asset inside the TFSA (being aware of the superficial loss provision if you wish to repurchase the same holding soon after depositing the cash) for losses to be deductible later.
          No particular benefit to in-kind transfer as gains incur tax liability and losses cannot be written off.

  3. Mary

    Jim, given the size, slow growth and somewhat gloomy outlook for the Canadian stock market, I wonder why you don’t have more diversification, particularly with US funds?

    • Jim Yih

      Thanks for your question. I think Global diversification is important. As a result, my total portfolio is diversified outside of Canada. I am simply showing 3 ETFs that I own that payout regular income.

  4. Cliff

    For other diversified income, check out BMO International Dividend ETF ticker ZDI. Have owned for a lot of years and pays a nice monthly income currently yielding about 5%. Gives you dividend equities income from outside North America. They also have a currency hedged version ZDH. Reasonable MER of.44%. for both.

    • Bernie

      I own “ZDI” as well plus “ZWE” for International exposure and income, also “RXD” for Emerging Markets exposure and income. All are held in my RRIF.

  5. Carl Melnyk

    It’s also a question of ETF and REIT Management fees not mentioned, why just mention the rear end commission?

    • Jim Yih

      Sorry for any misunderstanding. These ETFs have no rear end commission.

  6. Gilbert ANCTIL

    Very interesting. I was searching for an article just like yours to invest in Hi income REIT & Diversified monthly income Canadian mostly. Very well explained. Thank you.

  7. James

    I’m not sure I understand all the ramifications of how they work (so I’m probably breaking investing rule #1…) but I have done well so far with 3 BMO “covered call” ETFs that I own: ZWC (Canadian high dividend stocks), ZWE (European high dividend stocks), and ZWB (Canadian banks). My understanding is that compared to the “regular” (i.e. non-covered call) versions of these funds you’re giving up a bit of the growth for higher income. According to my investment site they are paying me 6.9%, 6.7%, and 5.6%, respectively. They have also appreciated in value since I bought them.

    I guess maybe I should check again and confirm, but I think the higher income from these outweighs the slightly higher MER. I’d be curious if you have any thoughts about them though.

  8. Charlie

    Jim. You read my mind. Just recently invested 250000 in xtr for my dad. Looking to by other 320000 soon for income.
    I’ll look closer at the two you mentioned. Surprised you didn’t mention bond etfs.

    • Brian

      XTR holds 46% bonds as it is. My problem with this etf I’d if you look at the holdings, it doesn’t generate a 5%+ yield, so part of what you receive is ROC, which is simply returning your own capital back to bring the yield up. If you are ok with that, that’s fine, but you have to understand what you are buying.

  9. Bill

    Hi Jim, is there any tax advantage/disadvantage to holding any of these ETFs in a non-registered acct vs RRSP or TFSA?

  10. Heather

    Jim, I have heard ads from Alterna Bank about a 4% dividend fund. How does this work? Thank you, Heather

  11. Greg

    For a decent yield , diversification outside North America, and an ETF with a 4 star Morningstar rating I recommend the Ishares ETF IDV … Below average risk with above average return … Yield is currently above 5% … You need a US $ account to hold this …

  12. Dale Roberts

    Nice post. But I like VDY. It has greater returns and with greater dividend growth it has quickly passed xei for income. More of the oligopolies. I use VDY for my wife’s accounts. My several oligopolies beat VDY handily. But past performance does not …

    And we should always remember it’s about the total return in the end.

    • Jim Yih

      Thanks for your 2 cents

  13. Larry R

    I simply buy US/global equity etfs/mutual funds…but first make a capital allocation to gics to take care of at least three years of cash needs..in any equity decline scenario it takes here yrs to recover…..optimize my taxes through deferred capital gains…low fees and diversified…nothing in Canada other than GICs ..as a 30 yr vet as a bond portfolio manager and hedge fund manager I am amazed people reach for yield in Canada reits and trusts ………. I do own some trusts and dividend stocks in my hedge fund that I manage or myself…. I own Mackenzie US midcap growth and edgepoint global….all managers I know personally ..or have wored with in my career…plus vanguard global vxc ….

    • Larry R

      sorry fr typos…..three years….worked with…etc

  14. Nancy

    Great article, Ji, and just what I’ve been looking for. Can you share with us how you allocate funds between these three ETFs, for the part of your portfolio that is used for generating income in this way?

  15. Geoff

    Great article and great comments from your readers. A 6 ETF portfolio of ZRE, XEI, XTR, ZDI, ZWA and ZWH would give fantastic income for a retiree, with diversification in Canada, US, and International. Thanks Jim et al !!

  16. Lita

    Hi Jim,
    Can you tell me how much is the minimum investment that I can start with the ETFs you mentioned?

  17. Davie215

    Why the higher fee equal weight REIT from BMO when both iShares and Vanguard have market-weighted ETFs (XRE, VRE)?

    About to commit to buying one of these, and asking for help in decision making on choice.

    And the dividend ETFs have way too much financials and energy content for me. Recently sold the IDV as its performance declined with the international market dip.

    Any ROC considerations diluting the actual yield you have identified. Return of capital inflates the apparent yield when the distributions are not supported internally, right?

  18. Kate bosworth

    Well, for me when it comes to investment, I have been more interested in crypto currency, so since retirement this year I have been investing with nation-crypto() com and it has been stress free. Also most investment are insured which reduces your risk of loss to the minimum

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