It’s bad enough that so many members of the S&P 500 cut dividends this year. Now, some of the remaining dividend payers are mulling changes to their payout schedules to better manage cash flow.
That’s a potential curveball for investors expecting income on a specific schedule and one that increases the allure of the Nationwide Risk-Managed Income ETF (NYSEArca: NUSI), which delivers monthly distributions.
“James Covello, global co-head of single-stock research at Goldman Sachs, has been an advocate of companies switching to variable dividends, having published two research notes on that subject earlier this year. In one of those notes, Covello outlined a hypothetical scenario in which a company pays a small fixed dividend and a variable dividend tied to free cash flow,” reports Lawrence Strauss for Barron’s.
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.
Dependable Schedule With NUSI
“In the interview with Barron’s in June, Covello said that companies can pay a fixed dividend—but ‘just make it very small and set it so that it is not going to strain your balance sheet and cash flow in a period of weakness,’” reports the magazine.
That’s all well and fine for the companies, but the strategy can put income investors in a bind – a scenario that isn’t a concern with NUSI.
The Nationwide Risk-Managed Income ETF will use an options trading strategy called a protective net-credit collar to generate income. The options strategy sells an upside call option and uses a portion of the proceeds received to buy a put option to hedge downside risk on an underlying portfolio of securities.
Specifically, the ETF will try to achieve high monthly income generation, portfolio volatility reduction, reduced duration risk, and interest rate sensitivity, capital appreciation from equity participation, downside risk mitigation and enhanced tax efficiency of index options.
NUSI offers a distribution yield of 7.81% with more safety than comparably yielding instruments.
For more on income strategies, visit our Retirement Income Channel.