Dividends from common stocks are taking a beating this year, but that style of investing still merits consideration for long-term investors. However, it can use a compliment in the form of the Nationwide Risk-Managed Income ETF (NYSEArca: NUSI).
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.
Importantly, NUSI’s covered call strategy largely insulates the fund from the negative payout action income investors are dealing with this year, making it an ideal way to augment equity-heavy income streams.
“It’s tempting for investors striving to live off their portfolios in the current interest-rate environment to consider dividend-paying stocks as bond replacements,” writes Morningstar analyst Alec Lucas. “While equities have historically been 4 to 5 times more volatile and lack the protection afforded fixed-income securities in the capital structure, their yields offer an enticing alternative.”
NUSI Provides Positive Offset
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.
“Stock yields are lower now than at the end of the financial crisis, but they’re better than 10-Year Treasuries and competitive with corporate bonds,” according to Lucas. “In fact, the relative advantage of the S&P 500 hit a more than 20-year high in July, when it’s 1.96% projected one-year yield was about 3.6 times the 10-Year Treasury’s 0.55% yield and edged the Bloomberg Barclays U.S. Corporate Bond Index’s 1.91%.”
Covered call strategies can potentially augment a portfolio during periods of heightened volatility. The covered-call options allow an investor to hold a long position in an asset while simultaneously writing, or selling, call options on the same asset.
“It is better to focus on income generation itself in the context of total return and tax efficiency,” notes Lucas.
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.