DIVO - DIVO: Strong Alternative To VYM And SCHD Yielding 4.85%

2023-12-01 09:00:00 ET

Summary

• The Amplify CWP Enhanced Dividend Income ETF has outperformed popular dividend-focused ETFs SCHD and VYM in 2023.
• DIVO's strategy of blending traditional income investing with covered call options has resulted in a higher yield and better downside risk mitigation.
• I'm bullish on DIVO in 2024, predicting that dividend stocks will come back into favor as interest rates decline and more capital flows into the equity markets.

The Amplify CWP Enhanced Dividend Income ETF ( DIVO ) continues to push the envelope as to what dividend-focused ETFs can achieve. The Schwab U.S. Dividend Equity ETF ( SCHD ) and Vanguard High Dividend Yield Index Fund ETF Shares ( VYM ) are two of the most popular dividend-focused ETFs, but DIVO's strategy is gaining traction as its yield is modestly larger. There is a large demand for income-producing assets and investment products geared toward generating dividend income. Covered call and different option strategies have become increasingly popular over the past few years, and DIVO has taken a tactical approach to blend traditional income investing and utilizing the option market to boost the overall yield. The investment environment hasn't been attractive for many dividend stocks as the risk-free rate of return has exceeded many dividend yields. Treasuries, CDs, and money market accounts have become a lucrative alternative to dividend stocks as many have lost their appeal and share value in 2023. DIVO's approach continues to shine and stayed in lockstep with VYM and SCHD while producing additional yield. I think the market is setting up well for dividend investments in 2024, and I believe DIVO will continue to provide strong income while breaking out of its sideways trajectory.

Following up on my previous article about DIVO

In June 2022, I had written an article on DIVO ( can be read here ) as its approach was compelling compared to traditional covered call investment products. Since then, DIVO has appreciated by 2.46%, while its total return has been 10.14% when its dividends were factored in. While 2023 has been a lucrative year for big tech, dividend-focused companies and ETFs haven't been as fortunate, and I believe there is an opportunity on the horizon. I am following up on my previous article to compare how DIVO has performed in 2023 compared to VYM and SCHD and provide my thesis on why I believe DIVO will provide value for shareholders in 2024.

DIVO has fared better in 2023 on both downside mitigation and yield compared to SCHD and VYM

There are several reasons why I am comparing DIVO to SCHD and VYM. All three are equity-focused ETFs, DIVO just writes covered calls on the individual underlying positions, unlike SCHD and VYM. SCHD and VYM are two of the most popular dividend-focused ETFs, with just over $105 billion in assets under management ((AUM)) between them. Unlike other popular option overlay ETFs, DIVO isn't writing covered calls on an index or using a portion of its portfolio to generate income through ELNs. I feel that DIVO resembles SCHD and VYM in many ways and just goes a step further with adding covered calls to boost the yield a bit.

On a YTD basis, DIVO has outperformed both SCHD and VYM as it has mitigated downside risk a bit better. DIVO started the year at $35.58 and declined -1.01% to $35.22, while SCHD has fallen -4.69% from $75.40 to $71.86, and VYM has declined -1.91% from $108.29 to $106.22. This is important because income investing isn't predicated on capital appreciation, as many income investors are looking to utilize the capital markets as a proxy to generate income and preserve their allocated capital. In addition to preserving more of the initial investment, DIVO has generated a higher yield YTD than SCHD and VYM from the dividends that have been paid. DIVO has paid eleven dividends YTD totaling $1.56, which is a yield of 4.39% ($1.56/$35.58) based on its 2023 starting price. SCHD has paid three quarterly dividends in 2023, totaling $1.91, which is a yield of 2.54% ($1.92/$75.40). VYM has paid three quarterly dividends in 2023 totaling $2.38, which is a yield of 2.2% ($2.38/$108.29).

Assuming an investment of $10,000 was made into each ETF on 1/3/23, DIVO would have had the largest ROI, Yield, and highest current value when compared to SCHD and VYM. Assuming that the dividends were taken as cash rather than reinvested, the current value of DIVO would be $9,898.82, as 281.06 shares could be purchased. Those shares would have generated $439.18 in dividends for a YTD yield of 4.39% and a total ROI of 3.38%. Investing in VYM would have purchased 92.34 shares, and the current balance would be $9,808.85. VYM would have generated $219.64 of dividend income YTD for a total ROI of 0.28%. While VYM's total ROI was close to being negative, SCHD's total ROI was the only one in the red. An investment of $10,000 could have purchased 132.64 shares of SCHD, which would be worth $9,530.50 today. SCHD has generated $1.92 of dividend income per share, placing its dividends at $254.07. The YTD dividend yield is 2.54%, which isn't enough to offset the declining value of its shares, placing its current ROI at -2.15%.

Why I am bullish on DIVO in 2024

I am a hybrid investor and have a segment of my overall portfolio dedicated to producing income. DIVO has been an ETF that allows me to own a basket of high-quality individual large-cap equities while benefiting from the fund managers writing covered calls on the individual positions to increase the dividend income DIVO produces. I personally write covered calls on some of my positions, so this is a strategy I am very familiar with. I typically like to write out-of-the-money-covered calls on dividend stocks to increase the amount of annualized dividend income I am generating. I also utilize covered calls to manufacture a dividend from positions that don't generate a dividend, such as Palantir ( PLTR ) and PayPal (PYPL).

DIVO is an ETF that is structured to generate ongoing income while striving to generate capital appreciation. DIVO's portfolio exposure is set up so a single sector will not exceed 25%, and no individual security will exceed 8% of the portfolio's assets. DIVO's holdings are established and adjusted based on market capitalization, management track record, earnings, cash flows, and return on equity. I am a big fan of the ongoing attention that the fund managers pay to the underlying holdings, as this isn't a passive strategy index fund. DIVO generates its dividend income by collecting dividends from its underlying positions and writing covered calls. The managers look to generate 2-3% of its gross income from collecting the dividends from its holdings while implementing a single position covered call strategy to generate an additional 2-4% of income. DIVO takes a tactical approach and won't write covered calls for the sake of generating income. When one of the underlying stocks demonstrates strength or an increase in implied volatility, it identifies as an opportunity to write a call option against the position rather than keeping all positions covered and limiting potential upside. This helps keep DIVO somewhat unrestricted, where it can benefit from a market that is appreciating in value.

Since my last article, DIVO's AUM has increased by 95.56% from $1.49 billion to $2.91 billion. There is $5.73 trillion sitting in money market accounts, not including capital locked up in CDs and treasuries. The Fed is projected to start its rate-cutting cycle sooner than expected . For quite some time, the earliest that CME Group factored in a rate cut was March 2024, and now there is a 5.9% chance that we will see a 25-bps cut at the January meeting. Over the past week, the chances of a 25-bps rate cut in March have increased from 28.4% to 42.9% per CME Group. As rates decline, the risk-free rate of return will become less attractive to investors who are utilizing money market accounts, CDs, or treasuries as proxies to manufacture yield. My prediction is that some of this capital will flow back into the equity markets, and we will see dividend stocks that have a combination of dividend growth and 10+ years of annual dividend increases come back into favor. This should benefit DIVO indirectly as its underlying assets see higher volume and directly as more capital could flow into DIVO directly.

Conclusion

Since DIVO's inception on 12/13/16, shares have appreciated by 42.32% from $25 to $35.58 while generating an additional $11.85 in dividend income. Dividend stocks have been out of favor in 2023 as the risk-free rate of return is higher than it has been in several decades, yet DIVO has mitigated downside risk more than two of the most popular dividend-focused ETFs, SCHD and VYM. I align with DIVO's tactical covered call approach, and it allows me to invest in a basket of large-cap equities and have the management team do the work for me to produce additional yield. I think that the Fed will pivot sooner rather than later, and rates will decline to a point where investors want to get ahead of the curve by redeploying some of the capital sitting on the sidelines back into the equity markets. I plan on increasing my position in DIVO as I think it will benefit from a changing rate environment and provide investors with an opportunity to recreate the yield they have become accustomed to.

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