A prominent theme facing income investors this year is a slew of dividend cuts among S&P 500 companies, including some previously revered payout machines, but the Nationwide Risk-Managed Income ETF (NYSEArca: NUSI) is proving investors can generate ample income without significant risk.
The trend of dividend cuts really ramped up in mid-March as stocks swooned amid the coronavirus pandemic. While some market observers believe the worst is over on that front, NUSI and its yield of more than 7% still stand out.
“The best evidence of that change in affairs may be seen in the following chart tracking the cumulative number of dividend cuts and omissions announced during 2020-Q2, wherefrom Day 62 through Day 76 (1 June 2020 through 15 June 2020), the rate at which these dividend reductions and suspensions are being announced has considerably slowed from the torrid pace we were observing earlier in the quarter,” according to Seeking Alpha.
NUSI: Right Place, Right Time
NUSI is an actively managed portfolio of stocks included in the Nasdaq-100 Index and an options collar. Per index rules, the fund only invests in the top 100 largest by market cap, nonfinancial stocks listed on NASDAQ. A collar strategy involves selling or writing call options and buying put options, thus generating income to hedge some downside risk. The strategy seeks to generate high current income monthly from any dividends received from the underlying stock and the option premiums retained.
“So far in the first half of June 2020, we’ve counted 15 firms announcing dividend cuts or suspensions in our sampling of dividend declarations, far fewer than we’ve seen during similarly long blocks of time during the past three months,” notes Seeking Alpha.
NUSI avoids some of the current dividend risks with the S&P 500 because the Nationwide ETF is an income-generating spin on the Nasdaq-100 Index (NDX), an index lightly allocated dividend-offending sectors, such as energy and real estate.
Consumer discretionary is another dividend-offending sector, but the bulk of the Nasdaq 100’s components from that group weren’t dividend payers at the start of this year.
The Nationwide Risk-Managed Income ETF incorporates options exposure to help generate income and mitigate risk as a way to enhance total returns. Investors have long capitalized on covered call options strategies for income generation or protective put options strategies to protect against and limit losses.
For more on income strategies, visit our Retirement Income Channel.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.