Q: Thank you for the Money Saver's email " Avoiding The Yield Trap " on covered call ETF's. Garth’s question and your answer from February 25, sparked more questions. Also read all the Q&A on HBND.
My understanding HBND is 50% covered call on Treasury ETFs (eg: TLT, VGLT, VGIT, etc.) with target yield of 10%. Dividend growth is reliant on interest rate rising. You answered on Oct 6, 2023: “…But if rates stagnate or decline….the yield on this ETF may come under pressure, but its unit price can see capital appreciation”. Expectation is interest rate may go down this year.
Is it better to invest in HBND or dividend grower in the long term? So, I created a spreadsheet to determine the breakeven period where a dividend grower will match the annual dividend paid by HBND if dividend yield stays around 10%. I choose four random dividend growers FTS, SLF, TD, T with average historical annual dividend growth of 5%, 9%, 6% and 7% respectively. Starting point: Annual dividend payment as of January 2, 2024, no DRIP and no additional stock purchases.
If HBND dividend yield target yield remains around 10%, the number of years, when the annual dividend grower payment would exceed HBND annual dividend payment for FTS in 18 years, SLF in 13 years, TD in 16 years and T in 8 years.
Based on these results, if a person requires dividend income is the next 10-12 years, than HBND is a possible income source. However, if the dividend income is not required for more than 10-12 years, a viable option is to purchase a dividend grower since the annual dividend amount should exceed HBND and continue to grow.
Note: This is a simplistic point of view since HBND target of yield may drop with interest rate expected to drop later this year, a dividend grower rate may drop, no drawdown in capital for more than 10 years or black swan events. This exercise is focus on dividend not capital appreciation. This exercise could be applied to other income stocks (eg: XHY, HPYT),
Is this logic flawed? What other points should I consider? Is there a role for HBND or other high yielders in wealth accumulation portfolio vs wealth decumulation phase? Inflation in the last couple of years has reinforced (for me) to consider dividend growth to be able to fund retirement income for hopefully a few decades.
Thank you for your thoughts.
My understanding HBND is 50% covered call on Treasury ETFs (eg: TLT, VGLT, VGIT, etc.) with target yield of 10%. Dividend growth is reliant on interest rate rising. You answered on Oct 6, 2023: “…But if rates stagnate or decline….the yield on this ETF may come under pressure, but its unit price can see capital appreciation”. Expectation is interest rate may go down this year.
Is it better to invest in HBND or dividend grower in the long term? So, I created a spreadsheet to determine the breakeven period where a dividend grower will match the annual dividend paid by HBND if dividend yield stays around 10%. I choose four random dividend growers FTS, SLF, TD, T with average historical annual dividend growth of 5%, 9%, 6% and 7% respectively. Starting point: Annual dividend payment as of January 2, 2024, no DRIP and no additional stock purchases.
If HBND dividend yield target yield remains around 10%, the number of years, when the annual dividend grower payment would exceed HBND annual dividend payment for FTS in 18 years, SLF in 13 years, TD in 16 years and T in 8 years.
Based on these results, if a person requires dividend income is the next 10-12 years, than HBND is a possible income source. However, if the dividend income is not required for more than 10-12 years, a viable option is to purchase a dividend grower since the annual dividend amount should exceed HBND and continue to grow.
Note: This is a simplistic point of view since HBND target of yield may drop with interest rate expected to drop later this year, a dividend grower rate may drop, no drawdown in capital for more than 10 years or black swan events. This exercise is focus on dividend not capital appreciation. This exercise could be applied to other income stocks (eg: XHY, HPYT),
Is this logic flawed? What other points should I consider? Is there a role for HBND or other high yielders in wealth accumulation portfolio vs wealth decumulation phase? Inflation in the last couple of years has reinforced (for me) to consider dividend growth to be able to fund retirement income for hopefully a few decades.
Thank you for your thoughts.
Q: According to the T3 published on the CDS listing for 2023, the Return of Capital for 2023 for HBND was 70.7% and for HPYT it was 48%. I'm holding them in non taxable accounts so the source of the dividends doesn't matter, but isn't that level of ROC completely unsustainable and will just mean an erosion in the NAV?
thanks
thanks
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Horizons Active High Yield Bond ETF (HYI)
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iShares U.S. High Yield Bond Index ETF (CAD-Hedged) (XHY)
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TD Active U.S. High Yield Bond ETF (TUHY)
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Hamilton U.S. Bond Yield Maximizer ETF (HBND)
Q: Hello 5i team,
You recommended in a previous question TUHY instead of HYI (being terminated in March of this year). I also have XHY in my TFSA. Is not TUHY and XHY almost the same except that XHY is CAD-hedged and is larger in market cap?
I am wondering which one has Canadian high yield bond exposure as well as US? Or is it that there is not much coverage in CAN in general?
Andrew
You recommended in a previous question TUHY instead of HYI (being terminated in March of this year). I also have XHY in my TFSA. Is not TUHY and XHY almost the same except that XHY is CAD-hedged and is larger in market cap?
I am wondering which one has Canadian high yield bond exposure as well as US? Or is it that there is not much coverage in CAN in general?
Andrew