Investors can focus on dividend income payers and related exchange traded fund strategies to shore up their investment portfolios and help generate monthly income to wait out the ongoing risks.
In the recent webcast, In Times of Uncertainty, This Play Can Unlock Opportunity, Bill Belden, president of Amplify ETFs; Kevin Simpson, founder and CIO of Capital Wealth Planning, LLC; and Jane Edmondson, founder and CEO of EQM Indexes, argued that in times of uncertainty, the need to generate monthly income becomes a priority, but it’s important to also remain poised for any upcoming rally. Investors can make a defensive play that can also provide a healthy monthly income stream potential.
Investors in need of current income are hard-pressed to find viable solutions. The current low rates make it difficult to generate material income. The size of income is often prioritized over-growth of income, resulting in longer-term issues. Meanwhile, upside potential may be forfeited if investors are too dependent on bonds for their income.
Consequently, the strategists highlighted two strategies to address this current income challenge: seeking companies with a history of growing earnings and dividends combined with covered calls option premiums.
Specifically, they highlighted the Amplify CWP Enhanced Dividend Income ETF (DIVO), which owns high-quality large-cap companies with a history of dividend and earnings growth, along with a tactical covered call strategy on individual stocks, and the Amplify International Enhanced Dividend Income ETF (NYSE Arca: IDVO), which seeks to provide monthly income from international dividend-paying stocks in the form of American depository receipts (ADRs) and by opportunistically writing covered calls on those stocks. The combination of capital appreciation potential, dividend potential, and estimated 2% to 4% option premium could help investors capture upside potential, lower portfolio risks, and generate annual income from two sources.
“Today’s heightened level of volatility could lead to higher premiums on a well-executed covered call strategy. Our tactical approach to covered call writing seeks to enhance investment income whether markets go up, down, or sideways,” according to Amplify ETFs.
Furthermore, the strategists pointed out that investors can also combat inflation by owning companies with a history of growing their earnings and dividends, a characteristic of the DIVO/IDVO selection process.
Along with these two strategies, Amplify ETFs has also recently launched the Amplify Natural Resources Dividend Income ETF (NDIV) to help income-minded investors diversify into the natural resources segment. NDIV invests in U.S.-traded American depositary receipts (ADRs) or over-the-counter (OTC) listed shares of global natural resource, and commodity-related companies, which include energy, chemicals, agriculture, metals and mining, paper products, and timber.
The U.S. energy industry continues to enjoy forward momentum despite ongoing calls to transition away from dirty fossil fuels. The energy and metals markets have been boosted by an upturn in demand aligned with the energy transition from “old energy” to forms of “new energy” which are more environmentally, and carbon friendly.
On the supply side, the industry has witnessed years of underinvestment, which has been prolonged by the increased focus on ESG principles. Having been burned in the past and faced with the long-term secular decline in fossil fuels related to the energy transition and ESG regulatory headwinds, energy companies have little interest in capital investment. Instead, many have opted to buy back shares or increase dividends to reward investors.
Furthermore, the strategists added that the current high inflation also favors commodity prices. Even looking further out, longer-term supply-demand dynamics continue to support the commodity supercycle theme. Investors should consider a natural resource dividend strategy now because inflation is at 40-year high levels. To curb inflation, central banks are raising interest rates, which has spurred the worst bond market performance in 40 years and derailed 60/40 allocations. Income investors are in desperate need of investment solutions that provide a source of yield that will keep up with inflation.
“The current inflationary environment of high energy and commodity prices, natural resource and commodity-related equity companies are in the ‘golden age’ of free cash flow,” according to Amplify ETFs. “Because these companies are not spending money on new capacity, balance sheets are becoming debt free, and free cash flow is being returned to shareholders in the form of 1. increasing fixed dividends, 2. high variable or special dividends, and 3. share repurchases.”
Financial advisors who are interested in learning more about dividend income generation can watch the webcast here on demand.