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Expanding capital income strategies in a rising rate environment

by SuperiorInvest

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

And as bond yields continue to fall rapidly amid a swinging bull-bear market, investors may have to look elsewhere for reliable income.

One possible solution is to focus on large-cap companies that not only pay dividends, but constantly increase their dividends.

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

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

DIVO’s top holdings include e.g UnitedHealth, Chevron, McDonald’s and Home Depot. In addition to being built around household names, an ETF portfolio manager can tactically write covered calls to potentially increase income beyond standard dividend payouts.

“So you really have two streams of income,” he said. “And I think that’s what’s really resonating with investors this year — especially when you combine the dividend income with the premium income from these covered calls.”

As dividend ETFs continue to outperform the S&P 500 this year, VettaFi’s Todd Rosenbluth said advisors are constantly looking for alternatives to traditional fixed income — including dividend income strategies and covered call strategies.

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

In addition, Rosenbluth said demand for dividend ETFs such as the Vanguard High Dividend Yield ETF (EXCEPT) and Schwab US Dividend ETF (SCHD) are on the rise.

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

For investors looking for a covered call strategy, Rosenbluth said the JPMorgan Equity Premium Income ETF (JEEP) invests in stocks with lower risk and adds an income component to it.

VettaFi recently surveyed advisors to explore their views on dividend strategies and discovered a possible shift in approach to funds.

“Instead of looking at it from the income side, which they have historically done through 2022 in a rising rate environment, they are now looking for additional growth from these strategies,” Rosenbluth explained.

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

“We think going into 2023 we’ll see more interest on the growth side than the income side of dividend ETFs,” he said.

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