Expanding equity income strategies in a rising rate environment

Despite recent economic data pointing to cooling inflation, uncertainty about future interest rate hikes remains elevated as the Fed continues to hint that a pause is not imminent.  

And as bond yields continue to fall at a rapid clip amid a seesawing market between the bulls and the bears, investors may have to look elsewhere for reliable income.  

One possible solution is looking toward large-cap companies that not only pay dividends but grow dividends consistently.  

The Amplify Enhanced Dividend Income ETF (DIVO) ranks in the top 5% of all ETFs in terms of inflows in 2022. The active strategy is made up of 20 to 25 blue chip stocks.  

“These stocks have a history of dividend and earnings growth,” Brian Giere, senior vice president at Amplify ETFs, said on “ETF Edge” on Monday.   

DIVO’s top holdings include the likes of UnitedHealth, Chevron, McDonald’s and Home Depot. Beyond being built on household names, the ETF’s portfolio manager can tactically write covered calls to potentially boost income beyond standard dividend payments.  

“So, you have really two sources of income,” he said. “And I think that’s what’s really resonating with investors this year — especially as you combine that dividend income, along with the premium income from those covered call options.”  

As dividend ETFs continue to outperform the S&P 500 this year, Todd Rosenbluth of VettaFi said that advisers are consistently seeking alternatives to traditional fixed income — including dividend income strategies and covered call strategies. 

“The DIVO product is actually a combination of those two,” Rosenbluth said on Monday.  

Additionally, Rosenbluth said that demand for dividend ETFs like Vanguard High Dividend Yield ETF (VYM) and Schwab US Dividend ETF (SCHD) are on the rise.  

“This looks like it’s an index-based approach,” he said of SCHD. “It focuses on companies that have consistently raised their dividend and provides broad diversification.” 

For investors seeking a covered call strategy, Rosenbluth said the JPMorgan Equity Premium Income ETF (JEPI) invests in lower risk stocks and adds an income component on top of it.  

VettaFi recently surveyed advisers to canvas their views on dividend strategies and discovered a possible shift in how they approach the funds.  

“Instead of looking at it from an income component that they’ve historically done throughout 2022 in the rising rate environment, they’re now looking for more growth from these strategies,” Rosenbluth explained.  

As a result, VettaFi expects dividend growth products to garner more attention, like the WisdomTree US Quality Dividend Growth ETF (DGRW) and Vanguard Dividend Appreciation Index ETF (VIG).  

“We think we’re going to see more interest in the growth side as opposed to the income side for dividend ETFs as we move into 2023,” he said.