DIVO: Strategically Using Covered Calls To Capture Price Appreciation And Income Simultaneously

seekingalpha09-04

J Studios Overview Dividend ETFs can make the process of investing really simple and eliminate the stress of trying to select what individual holdings are worthy of a position. Each dividend ETF may ...

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Each dividend ETF may ...</p>\n\n<a href=\"https://seekingalpha.com/article/4718938-divo-strategically-using-covered-calls-to-capture-price-appreciation-and-income-simultaneously\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"IE0004445015.USD","symbol_name":"JANUS HENDERSON BALANCED \"A2\" (USD) ACC","start_time":0,"source_url":"https://seekingalpha.com/article/4718938-divo-strategically-using-covered-calls-to-capture-price-appreciation-and-income-simultaneously","article_id":"2464354304","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1320226629/image_1320226629.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2464354304","pubTimestamp":1725461390,"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"J Studios Overview Dividend ETFs can make the process of investing really simple and eliminate the stress of trying to select what individual holdings are worthy of a position. 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Each dividend ETF may have a different strategy and approach to their holdings and Amplify CWP Enhanced Dividend Income ETF (NYSEARCA:DIVO) is no exception to this with the inclusion of a covered call option strategy. I previously covered DIVO a few quarters ago and wanted to provide an updated perspective on the ETF. On a year to date basis, DIVO has provided a total return of 14.4% which undercuts the return of the S&P 500 (SPY), but this is expected since the covered call aspect caps some upside growth. Data by YCharts One of the main benefits of DIVO is that it offers a larger yield than traditional dividend ETFs. The current dividend yield sits at 4.4% and distributions are paid out on a monthly basis. The combination of a higher yield and monthly distributions would be more beneficial for income investors that may have started to use the dividend income that's being generated from their portfolio of investments. DIVO finds a sweet balance between income generation and capital appreciation to still deliver competitive total returns when compared to other dividend ETFs. The downside is that even though the yield is higher than some alternative funds, it may not be high enough to generate a large enough source of distribution income without the need for a large upfront investment. Therefore, DIVO may be best suited for investors that still have some runway ahead of them before they need to start withdrawing portions of their distribution. With an ETF like DIVO, you can instantly gain access to a wide range of holdings. This diversity makes for a stress-free investing experience that is being actively managed by professionals. This level of diversity can capture market growth while also softening the impact of market downturns. DIVO sports an expense ratio of 0.56% and has assets under management totaling $3.48B. The ETF has an inception dating back to 2016, so while still relatively new in nature, it still has a sizeable history of performance that we can measure for reference. Let's first focus on the underlying strategy and holdings that makes DIVO a great choice for long-term investors. Strategy & Holdings According to Amplify's latest overview of DIVO, the ETF maintains a wide range of diverse across many sectors. There is a majority focus on the financial sector, which accounts for 19.75% of the fund's total assets. This is followed by exposure to the Health Care and Information Technology sectors, making up 15.43% and 15.40% respectively. This range of diversity helps mitigate any sector-specific concentration risk and allows for growth to be captured from different sources. I do like that DIVO maintains a sizeable exposure to the technology sector, since this is where the majority of the 'growthier' companies exist and allows DIVO to capture more capital appreciation during bull markets.   Amplify ETFs When it comes to individual holding selection, DIVO has a very intensive methodology to help filter out underperformers. The fund tends to lean towards favoring large cap holdings that have a solid track records of dividend growth and earnings growth. The focus on earnings growth helps ensure that holdings are generating larger amounts of capital year after year and generally have healthy balance sheets as well. DIVO's holdings are limited to approximately 36, which makes it more focused in size when compared to alternative ETFs. Looking at the most recent fact sheet, the top holding is currently UnitedHealth Group (UNH), making up 5.54%. This is followed by positions in Microsoft (MSFT) accounting for 5.35% and Caterpillar making up 5.04%. These are all dividend-paying companies that have grown distribution amounts year over year and maintained healthy dividend payout ratios. These top ten holdings have also grown earnings year over year, which has helped DIVO capture some nice price growth.   DIVO Fact Sheet What makes DIVO unique is that the fund implements a covered call strategy against the underlying holdings within as a way to generate a higher amount of income. This is the reason why DIVO is able to offer a higher yield than alternative funds. Reviewing the prospectus reveals that DIVO can use what is essentially out-of-the-money call options that can generate income as well as allow for the underlying positions to experience price growth. The strategy aims to capture gross income of approximately 2% to 3% from dividend income generated from the individual positions in combination with 2% to 4% from the premiums collected on the options. In selling call option contracts, the Fund effectively sells its ability to participate in gains of the reference security beyond the predetermined strike price in exchange for the premium income received. Unlike a systematic covered call program, CWP is not obligated to continuously cover each individual equity position. When one of the underlying stocks demonstrates strength or an increase in implied volatility, CWP identifies that opportunity and sells call option contracts tactically, rather than keeping all positions covered and limiting potential upside. - DIVO Prospectus Instead of writing options against every one of the underlying equities, management can selective choose which holding to implement the option strategy on based on market conditions and the opportunity that is present. This is beneficial because this means that management can choose not to implement an option writing strategy on an equity that they believe may have large upside potential so that DIVO can partake in the full amount of the upside movement. This concept makes DIVO a standout choice where investors can experience the best of both worlds by having income and capital appreciation. While the capital appreciation may not be as strong as some peer funds, it will still allow investors to partake in bull markets and see portfolio values grow over time alongside the rest of the market. However, there are some vulnerabilities of DIVO when investing with a long-term outlook. Performance Vulnerability If you don't necessarily care for the income aspect of an ETF and would rather maximize the total return, DIVO should not be your first choice. Despite the option strategy of DIVO still allowing for capital appreciation to be experienced, there is evidence that it still reduces the upside growth potential over long stretches of time. This makes the long-term performance vulnerable to significant underperformance. If you instead focus on total return, you may have a larger pool of cash to then shift to an income focus when a focus on income is more required later on in life. This is most relevant for younger investors that still have plenty of working runaway ahead of them. If you have a career that you earn active income from, you may not care to build a second stream of dividend income if the trade-off is to have a lower total return over an extended period of time. Just to demonstrate this, take a look at the comparison chart below to see the price change of DIVO compared to some alternatives such as Schwab U.S. Dividend Equity ETF (SCHD), iShares Core Dividend Growth ETF (DGRO), and Vanguard's Total Stock Market ETF (VTI). We can see that these alternative funds that are focused more on growth and allow for the full upside potential to be captured have all outpaced the price growth of DIVO. Data by YCharts This is just the nature of option strategies and isn't necessarily a negative thing about DIVO. It should just be clearly understood what the tradeoff here is if you are considering a position in DIVO. However, there is a benefit to the higher income levels generated from DIVO. The higher level of income helps offset the impact of price declines during bear markets and makes the price movement a bit more resilient and less volatile. For example, when interest rates were cut to near zero levels following the pandemic drop in 2020, DIVO's price moved to the upside as the lower rate environment boosted valuations. Data by YCharts When interest rates were aggressively hiked throughout 2022 and 2023, there were plenty of ETFs that were shaken by the rapid increases. As a result, we saw prices decline through most of 2022 before eventually stabilizing in the second half of 2023. In the chart above, we can see that DIVO's price was more stable during the period of May 2022 to May 2023 versus these alternative ETFs. The resilience is even more clear when comparing the price relationship against the federal funds rate fluctuations. Data by YCharts Dividend Income Benefit As of the most recently declared monthly dividend of $0.1611 per share, the current dividend yield sits at 4.4%. While the dividend yield is a bit higher than some peers, it does have a bit of a weakness when it comes to the lack of consistent raises every year. On the bright side, it's great that an investment in DIVO requires less up front capital invested to generate a higher level of income compared to these peers. Just for reference, here are the starting dividend yields for some of the alternative dividend ETFs out there.  Schwab U.S. Dividend Equity ETF (SCHD): 3.35% Vanguard High Dividend Yield ETF (VYM): 2.80% iShares Core Dividend Growth ETF (DGRO): 2.19% SPDR S&P Dividend ETF (SDY): 2.39%  DIVO's dividend growth is one of the weakest aspects of the fund. For instance, the dividend has increased at a CAGR (compound annual growth rate) of only 2.7% over the last five-year period. Even on a smaller time period of three years, the dividend has increased at a measly CAGR of 0.20%. However, despite the poor dividend growth, the higher starting yield enables long-term holders to compound their dividend income at a quick rate with continued reinvestment and continually adding new capital on top of the original position. In order to demonstrate this, I back tested an initial investment of $10,000 in DIVO, SCHD, and VYM to compare the dividend income growth year over year. This initial investment was calculated at the start of 2017 through the present day. This assumption includes all dividends being reinvested, as well as a fixed monthly contribution of $500 throughout the entire holding period. The blue bar represents DIVO, the green represents SCHD, and the gray represents VYM. In year 1 of your investment, here is the dividend income you would have received for each of the respective holdings:  DIVO: $611 SCHD: $412 VYM: $425    Portfolio Visualizer Fast forwarding to the full year of 2023, DIVO would still be leading the pack with the largest dividend income amount. This is despite SCHD maintaining a large double-digit dividend growth rate over the last ten-year period. This is the benefit of a higher starting yield. Here are the full-year results for 2023, assuming that capital continued to be reinvested every month and dividends were reinvested back into the core holdings.  DIVO: $3,794 SCHD: $2,950 VYM: $2,398  Takeaway  In conclusion, DIVO stands as a great choice for dividend investors that want to capture the best of both worlds by obtaining income and capital appreciation. The strategic implementation of a covered call option strategy allows for a higher upfront dividend yield. Despite the dividend growth lacking, investors can essentially create their own growth with continued reinvestment and accumulation of more shares. DIVO grants instant exposure to a wide range of holdings that are hand-picked around their earnings and dividend growth year over year. This ensures that the ETF maintains exposure to some of the highest quality large cap holdings. However, it should be understood that DIVO may not be the best choice if you are seeking a high total return, as the option strategy still ultimately limits the price growth that can be experienced.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"1","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2464354304"}