DIVO - DIVO: Sacrifices Total Return For Splashes Of Income

2023-09-09 02:05:00 ET

Summary

• DIVO aims to provide investors with a monthly income stream from dividends, covered calls, and potential price appreciation.
• The fund has a higher starting yield of 4.8% but lacks dividend growth.
• DIVO's total return metrics align with the SPY and may be good for investors who prefer a hybrid approach between growth & income.

Overview

Amplify CWP Enhanced Dividend Income ETF (DIVO) sets out to offer investors a monthly income stream generated from dividends, strategically executed covered calls, and potential price appreciation from its underlying assets. DIVO's stated objective is to achieve an annual gross income of approximately 2-3% from dividend income and 2-4% from option premiums. A cool aspect of the fund is that DIVO writes calls against only 20% of its holdings, and the remainder of the positions are left alone to capture potential upsides.

This setup can be beneficial depending on what kind of investor you are. This may benefit investors that have a hybrid style between growth and income because rather than blindly employing a covered call strategy across the entire portfolio, investors may prefer to allow certain stocks to appreciate, especially during expected strong earnings quarters, instead of merely collecting premiums and potentially having their positions called away when stock prices surpass the strike price.

Holding Allocation

Financials, healthcare, and consumer staples lead in sector allocation here. Financials boost up the over yield to about 4.8% annually. DIVO's investment strategy revolves around acquiring and holding high-quality, large-cap companies, all while maintaining a diversified exposure across various sectors. In addition to the dividends generated from these holdings, the fund's management actively pursues a covered call strategy on individual equities within the portfolio when market volatility rises.

DIVO offers a distinctive advantage to investors, primarily due to its focused portfolio composition , which features well-established companies. Visa ( V ), Apple ( AAPL ), Procter & Gamble ( PG ), and Microsoft (MSFT) are some of DIVO's largest positions sizes. These popular stocks do make DIVO feel a bit more "safe" to hold because these are all companies that we generally agree are likely to be worth more in the future.

This concentrated approach simplifies the assessment process for investors. In contrast, funds with numerous holdings, each representing only a small fraction of total assets, present a unique challenge when it comes to evaluating performance. In such cases, market risk takes center stage, and individual stock performance has limited impact on the fund's overall results.

Comparison

We can see that compared to two of DIVO's peers, First Trust Nasdaq BuyWrite Income ETF (FTQI) and Siren DIVCON Defender ETF (DFND), DIVO outperforms by a large margin. FTQI is constructed much different with Technology and Communication companies as the majority sector make-up. Likewise, DFND has a much structure with Technology and Financials as the front-runners.

DIVO's dividend yield sits around 4.8% compared to FTQI's higher 12% dividend yield and DFND's lower 1.5% dividend yield. It's always hard to recommend a dividend based ETF that has an objective to distribute cash flow to investors when it doesn't have a great track record of growing the dividend. In the case of DIVO though, the price action alone makes up for it as it's done a great job capturing upside movement.

If you were to invest $10,000 into DIVO at inception, your first year of income would have been $453. Your dividend income would have peaked for 2019 at $1,141 earned from your original $10,000 investment. It's hard to gauge these things because of COVID and the pandemic, but if you were to continue holding DIVO, your annual dividend income would've fallen 43% down from its 2019 peak to only $640 in 2023. This doesn't exactly make a good case for the retired investor looking for steadily increasing distributions.

Instead, DIVO better suites the investor who is looking to add a splash of income to their portfolio. Perhaps, an ETF like DIVO would be best for the investor that is okay with sacrificing a bit of total return in exchange of income. Comparing DIVO against ( SPY ) and ( VTI ), you really aren't sacrificing that must total return in my opinion since DIVO has done a good job on capturing the price upside without including distributions. This will be the most important weighing decision that DIVO investors will need to make when considering an investment here.

Risk

I consider the lack of dividend raises a major risk. Seeking Alpha's dividend scorecard gives DIVO a C- rating because of the lack of dividend distribution growth. Having safe and consistent distributions just isn't enough for an investor like myself. I also like to see that the dividend payouts are increasing year over year. If my income isn't growing, neither is my satisfaction with a fund. Granted, DIVO may get cut some slack because the pandemic happened and the fund is still relatively new in my opinion.

As it stands though, a 1.67% average 5 year dividend growth rate is very disappointing. This is especially true when comparing it against some of the other popular dividend ETFs out there. We can see that DIVO has the worst dividend growth. Personally, I hate seeing any sort of distribution get reduced but because of the way DIVO is structured, that's something I'd have to live with.

Although, it wouldn't be fair to ignore that dividend ETFs like (SCHD), (VYM), and (NOBL) are all structured much differently from DIVO but you get the point here. It should also be mentioned that DIVO has a higher staring yield than almost all of these mentioned funds. Still, it becomes really difficult to recommend a fund like DIVO because all of these similar funds have preserved capital, seen share price appreciation, and much better dividend raises than DIVO. I don't think these factors necessarily make DIVO a sell, but these are all valid points to recognize when considering an ETF that has the mission of distributing cash flow back to you as the investor. So once again, a risk here is that your income may not grow at an acceptable rate and you will be underperforming similar dividend focused ETFs, despite the higher starting yield.

Conclusion

In conclusion, the Amplify CWP Enhanced Dividend Income ETF presents a unique opportunity for investors seeking a blend of income and growth. DIVO's focused portfolio, consisting of prominent companies like Visa, Apple, Procter & Gamble, and Microsoft, provides a sense of security due to its inclusion of well-established names with promising futures.

While DIVO may not be ideal for investors seeking steadily increasing distributions, it can benefit those looking to add income to their portfolio without sacrificing substantial total return. The major risk lies in its relatively modest 1.67% five-year average dividend growth rate compared to other dividend ETFs, though the unique structure of DIVO should be considered when evaluating its suitability for your investment goals. Ultimately, DIVO offers a distinctive approach, combining income and growth potential, making it a viable choice for investors with the right objectives.

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