DIVO - DIVO: This Dividend Grower Deserves Your Full Attention

2023-04-28 12:28:13 ET

Summary

• DIVO has experienced strong fund inflows over the past year.
• The fund is unique in its concentrated holdings and tactical strategy of covered call writing.
• The fund holds up to 25 large-cap, dividend stalwart stocks.

Background

When we look back at the history books, 2022 is likely to stand out as a banner year. It was, after all, the year in which the forty-year bond bull market came to an end amidst rising interest rates. It was marked by the rapid resurgence of inflation, and an accompanying rise in interest rates from the Federal Reserve.

It was also the year in which the high-flying (often profitless) growth stocks finally fell to earth and a year in which the much-maligned world of value and dividend-paying stocks came back into vogue.

Given that interest rates are likely to remain elevated for longer, we expect that investor's flight to dividend stalwarts will continue as the air continues to be let out of the growth balloon (specifically low-profit, poor-margin growth companies).

The Amplify CWP Enhanced Dividend Income ETF ( DIVO ), then, is a fund which we believe offers a compelling case for investors seeking to hold high-quality names with strong dividends. Let's dive in.

The Fund

Armed with a five-star rating from Morningstar, DIVO seeks to provide investors with monthly income from dividends, tactically written covered calls, and price appreciation from its underlying assets. According to the most recent investor fact sheet (dated March 31st, 2023), DIVO aims to "provide gross annual income of approximately 2-3% from dividend income and 2-4% from option premiums."

As of this writing, the fund has an indicated dividend yield of 4.75%, and according to the fact sheet has a 30-day SEC yield of 2.16%. The fund currently has around $2.89 billion in assets and has seen significant inflows in recent months.

As indicated above, the fund has had cumulative inflows of $1.59 billion over the past year, or roughly 50% of its current assets.

The fund seeks to buy and hold high-quality, large-cap companies while retaining broad sector exposure. In addition to the dividends provided by these holdings, the fund's managers actively pursue a covered call strategy on individual equities in the portfolio when volatility is higher and the CBOE Volatility Index ( VIX ) sits at 15 or higher.

We believe this approach is beneficial for investors overall. Blind covered call writing against the entire portfolio is, we believe, not optimal, because all of the stocks may not be similarly positioned. Investors may prefer to allow a stock to appreciate through, say, an expected strong quarter for earnings rather than collect a bit of premium and then have their position called away when the price blows past the strike price.

Aside from our strategic opinion, the strategy has worked well for the fund. Since the fund's inception in December 2016, it has delivered an annual return to investors of 11.56%, compared to the S&P 500 Buy-Write Index return of 5.01% for the same period.

Concentration

One of the features of this fund which is likely to divide investors is the fact that this is one of the rare ETFs that doesn't hold investments in hundreds or even thousands of companies. Instead, DIVO holds 22 individual equities (the fund states that it could hold anywhere between 20-25 positions) and (as of this writing) covered call positions on six of them.

Given the fund's objective of holding large-cap, dividend-grower companies, it's not surprising that the fund's top ten holdings are more or less household names.

The fund is also, in our opinion, respectably diversified across the various S&P 500 ( SPY ) sectors.

One of the benefits of DIVO for investors - given its concentration and the well-known names that it holds - is that the fund is relatively easy to assess. For example, funds with hundreds of names and no holdings greater than a percentage or two of assets pose a unique challenge when investors try to understand performance, because the breadth of the indexing means that market risk is the primary concern, while individual stocks that outperform contribute relatively little to the fund's overall performance.

DIVO investors, on the other hand, can fairly easily assess if a few or several of the fund's holdings appear to be strong or a drag. Market risk, of course, is always present, but the fund's concentration and the names it holds in particular offers (in our opinion) a bit of transparency for investors that can feel lacking in other ETFs.

The Bottom Line

Risks to DIVO would be a recession that cuts much deeper than expected, which would likely drive investors away from equities and into risk-off assets. However, due to the stalwart nature of its holdings and the fund's strategy of writing covered calls as volatility rises, we think the risk is cushioned somewhat.

DIVO is a unique fund in the dividend and covered call world, both for its concentration among large-cap names and its tactical (versus blanket) covered call strategy. The fund has strong inflows and has consistently outperformed its buy-write index benchmark. With an expense ratio of 0.55%, we believe this fund is one investors should take a serious look at when seeking large-cap dividends and options premium.

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