ZWHC.TO's CAD 0.16 Dividend: A Secure Bet on Healthcare with Covered Calls

The BMO Covered Call Health Care ETF (ZWHC.TO) recently declared a monthly cash distribution of CAD 0.16 per unit, marking a notable increase from its prior average of CAD 0.10–0.11. This move underscores the strategic advantages of covered call ETFs in the healthcare sector, particularly as investors seek stability amid rising interest rates and volatile markets. Below, we dissect why ZWHC's structure, dividend resilience, and sector-specific tailwinds make it a compelling investment for income-focused portfolios.

The Power of Covered Calls in Healthcare

Covered call ETFs like ZWHC combine equity exposure with income generation by selling call options on a portfolio of stocks. This strategy involves writing call options on up to a portion of the holdings (typically 30–40%), collecting premiums that are distributed to investors. For healthcare, this structure offers two critical benefits:

1. Stable Income Amid Volatility: Healthcare is a defensive sector with steady demand driven by aging populations and chronic disease management. By monetizing option premiums, ZWHC generates predictable cash flows even if underlying stocks stagnate. The recent CAD 0.16 dividend reflects this dynamic, as higher premiums from covered calls—likely tied to subdued market volatility—boosted payouts.

2. Downside Protection: Selling call options caps potential upside gains but reduces downside risk. If healthcare stocks decline, the premiums offset losses. This makes ZWHC less sensitive to sector pullbacks, such as those seen in early 2025 when broader markets wavered.

Dividend Consistency: A Track Record of Resilience

While ZWHC's dividend history shows gradual adjustments—rising from CAD 0.10 in early 2023 to CAD 0.11 by late 2023 and now CAD 0.16 in 2025—the trend aligns with its covered call model. Unlike traditional ETFs tied to price appreciation alone, ZWHC's payouts reflect both equity performance and option premium income.

Even during periods of healthcare sector stagnation, such as Q1 2025, ZWHC's monthly distributions remained intact. This consistency contrasts with equity-only ETFs, which rely on rising stock prices to sustain income. For example, the iShares S&P/TSX Capped Health Care Index ETF (XHE.TO) saw its trailing yield dip to 0.7% in early 2025, while ZWHC's annualized yield now stands at ~1.9% based on its recent distribution.

Why Healthcare Thrives in Rising Rates

The Federal Reserve's prolonged rate-hike cycle has pressured bond yields, pushing investors toward dividend stocks and ETFs. Healthcare's low correlation to interest rates and structural growth drivers make it a standout sector:
- Aging Populations: The global elderly population is projected to reach 2.1 billion by 2050, fueling demand for medical devices, pharmaceuticals, and senior care services.
- Innovation Boom: Breakthroughs in gene therapy, AI-driven diagnostics, and telemedicine are expanding healthcare's addressable market.
- Defensive Cashflows: Healthcare companies often exhibit stable cash flows, making them less sensitive to macroeconomic downturns.

ZWHC's portfolio, which tracks a basket of global healthcare stocks, benefits from these trends while its covered call strategy amplifies income.

Low Volatility Meets Monthly Income

ZWHC's monthly distribution schedule provides steady cash flow, ideal for retirees or income-focused investors. Combined with its low volatility profile—its beta coefficient of 0.8 (vs. 1.0 for the S&P 500)—it acts as a ballast in portfolios.

In 2024, while the broader healthcare sector returned just 2.3%, ZWHC's covered call strategy generated a total return of 3.1%, including dividends. This outperformance highlights its risk-adjusted appeal.

Immediate Investment Considerations

For investors seeking income and capital preservation:
1. Buy the Dip: ZWHC's recent dip to a CAD 19.50 NAV (down from CAD 20.20 in early 2025) presents an entry point, as its dividend yield rises when prices fall.
2. Pair with Bonds: Use ZWHC to complement fixed-income holdings, capturing healthcare's growth while avoiding bond duration risk.
3. Long-Term Hold: The ETF's monthly distributions align with the “drip” investing strategy, compounding income over time.

Risks to Monitor

• Premium Compression: If volatility spikes, option premiums may shrink, squeezing income.
• Sector Overhang: Regulatory risks (e.g., drug pricing debates) could pressure healthcare stocks.
• Interest Rate Peaks: Should rates stabilize, bond yields may recover, reducing demand for equity income.

Conclusion: A Strategic Play for 2025 and Beyond

ZWHC.TO's CAD 0.16 dividend is more than a payout—it's a testament to the covered call model's ability to thrive in uncertain markets. With healthcare's demographic tailwinds and its own low-volatility structure, ZWHC offers a rare combination of income, downside protection, and sector exposure. For investors prioritizing stability, this ETF deserves serious consideration.

As the ETF's NAV hovers near CAD 19.50, the current entry point balances yield and growth potential. In a world of rising rates and shifting markets, ZWHC's blend of covered calls and healthcare's inherent resilience makes it a standout choice for income investors.