Monthly dividend ETFs have become a popular investment category in recent years, and why not? Building a portfolio of dividend ETFs that pay you each month is a great way to build a diversified and predictable stream of passive income that will compound over time. The Amplify CWP Enhanced Dividend ETF (NYSEARCA:DIVO) is one interesting option in this class for investors to consider.
DIVO’s dividend yield of 4.9% is not as high as some of the other popular names in the space, like the JPMorgan Premium Equity Income ETF (NYSEARCA:JEPI) or the JPMorgan Nasdaq Equity Premium ETF (NASDAQ:JEPQ) which boast dividend yields of 9.7% and 11.5%, respectively. But DIVO is still a viable option for income investors to consider as it offers a nice mix of yield and performance as we’ll delve into below.
What is DIVO ETF’s Strategy?
DIVO is an actively managed ETF, comprises a portfolio of top-tier dividend-focused stocks supplemented with covered calls on individual stocks. Its primary goal is to mirror the investment results of the Enhanced Dividend Income Portfolio (EDIP), a strategy managed by DIVO’s sub-adviser, Capital Wealth Planning (CWP). Since its launch in 2016, DIVO has impressively grown its assets under management (AUM) to reach $2.9 billion.
DIVO generates income by owning dividend-paying stocks and by “opportunistically writing covered calls on those stocks.” DIVO seeks to generate gross annual-income of 2-3% from dividend income and 2-4% from option premiums. DIVO strikes a nice balance here and this seems like a sustainable long-term strategy.
One potential downside of this strategy that should be noted is that by selling covered calls against its positions, some of DIVO’s upside from capital appreciation is likely capped. This is because selling covered calls caps the upside of its holdings. If the price of the underlying stock rises beyond the strike price, DIVO forgoes these additional gains.
Investors should be aware that DIVO is not particularly diversified. The fund holds just 25 positions, and its top 10 holdings account for 58.9% of its assets. Below, you’ll find an overview of DIVO’s top 10 holdings using TipRanks’ holdings tool.
DIVO’s largest position isn’t a stock at all, but a fixed income mutual fund that holds short-term government bonds and treasuries. This position makes up 12.8% of the fund. In the current rising interest rate environment, this doesn’t seem like a bad way for a dividend ETF to diversify its exposure as treasuries now feature competitive yields.
Outside of this fixed income position, DIVO owns many large-cap, blue chip U.S. stocks ranging from Microsoft and Apple to JPMorgan Chase and Goldman Sachs.
The fund is well-diversified in terms of sector exposure, as no S&P 500 industry accounts for more than 20% of the fund (financials and healthcare both have weightings of 17%).
Excluding the fixed income position, DIVO’s top 10 holdings collectively feature a strong group of Smart Scores. The Smart Score is a proprietary quantitative stock scoring system created by TipRanks. It gives stocks a score from 1 to 10 based on eight market key factors. A score of 8 or above is equivalent to an Outperform rating. Excluding the fixed income position, six of DIVO’s top nine holdings feature Outperform-equivalent Smart Scores of 8 or better. Visa and JPMorgan Chase lead the way with perfect 10 Smart Scores.
DIVO features an Outperform-equivalent ETF Smart Score of 8.
Is DIVO Stock a Buy, According to Analysts?
Turning to Wall Street, DIVO earns a Moderate Buy consensus rating based on 20 Buys, 5 Holds, and zero Sell ratings assigned in the past three months. The average DIVO stock price target of $40.60 implies ~15% upside potential.
As alluded to in the intro, DIVO is interesting because it offers an attractive mix of yield and performance. Some ETFs with high yields turn out to be ‘yield traps’. They attract investors with high yields but then lose money on an overall basis with negative total returns over time. That isn’t the case with DIVO. Again, its yield of 4.9% may not jump off the page at you, but its combination of yield and total return are attractive.
The fund has returned 9.1% over the past year. It has posted solid double-digit annualized returns of 10.5% and 10.1% over the past three and five years respectively. Since its inception in 2016, it has an annualized total return of 11.3%. Investing in vehicles that generate double-digit returns over a prolonged time frame is a great way to build long-term wealth.
Fees and Expenses
The only real downside of DIVO is its relatively high expense ratio of 0.55%. This expense ratio means that an investor allocating $10,000 into DIVO will pay $55 in fees over the course of the year. If this investor held DIVO for ten years, they would pay $689 in fees, assuming the expense ratio remains at 0.55% and the fund returns 5% per year.
These fees are a bit high, but DIVO is an actively-managed fund and it runs a fairly complex investment strategy, so it makes sense that it is more expensive than the typical index fund. Within the realm of monthly dividend ETFs, it is more expensive than the larger JEPI or JEPQ, which both charge 0.35%, but it isn’t out of line with these peers.
While its yield may not be as high as some of the other monthly dividend ETFs, DIVO offers a nice mix of yield and long-term performance, and its monthly payout is attractive to dividend investors. I like its balanced strategy of seeking to generate 2-3% gross income through dividend payments and 2-4% through options premiums. The main downside investors should be aware of is that its fees are a bit high, though not out of line. DIVO is a viable option for monthly dividend investors to consider adding to their portfolios. For investors who already own other monthly dividend ETFs, DIVO could also be a good way to diversify by adding another monthly dividend payer with a strong return profile into the mix.
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