How to Lower Your Risk With a Conservative Covered Call Approach on 3 Strong Buy Dividend Paying ETFs

Selling covered calls on conservative dividend-paying ETFs can lower your risk but still provide real returns for savvy investors and traders.



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The recent decline in 10-year Treasury yields, which is back well below the 4% level, has made dividend-paying stocks relatively more attractive. The fact that the Fed is closer to the end than to the start of recent rate hikes makes higher yielding stocks a solid choice for the months ahead.

Rather than choosing individual stocks, buying a higher yielding ETF may be a safer and wiser approach. Here are three A-rated funds – Strong Buy- Dividend to consider buying, along with a covered call to consider selling.

  • Vanguard High Dividend Yield ETF (VYM)
  • SPDR Dividend ETF (SDY)
  • iShares Select Dividend ETF (DVY)

These three ETFs all have risk below market risk (below 1.00 beta) and below market valuations based on both price-to-earnings (P/E) and price-to-sales (P/S) value. They also each have a greater dividend yield than the S&P 500. So generally a safer choice than the general market. A quick comparison of the three dividend ETFs versus the S&P 500 is shown below.

In addition, selling a covered call against the dividend ETF can further reduce risk and potentially generate higher returns.

Each of the three higher-yielding ETFs has different components that make up the overall basket of shares. Note how oil giant Exxon Mobil (XOM) is a large part of all three ETFS, but has slightly different weighting and ranking within each fund.

Let’s take a short walk through the three.

VYM (Vanguard High Dividend Yield ETF)

VYM has a price-earnings ratio (P/E) of just over 14 (14.09) and a price-to-sales ratio (P/S) just north of 2 (2.06). Both are discounted from the comparable stats for the S&P 500 of 18.43 for P/E and 2.96 (P/S). The beta for the VYM is 0.85, so a lower risk than the overall market. It has a return of 3.02%, well above the S&P 500 return of just 1.64%. It ranks #3 in the Large Cap Value ETF category.

The top 10 holdings in VYM account for more than 23% of total assets. JP Morgan (JPM) and Johnson and Johnson (JNJ) occupy the top two spots.

Selling July’s $116 call against VYM’s underlying buy could lower net costs by about $5.00 (over 4%), while still leaving about a 3% upside for the short strike of $116. Plus, you’ll still get more than a 3% dividend as long as VYM stays below $116.

SDY (SPDR S&P Dividend ETF)

It checks in at number 6 in the Large Cap Value ETFs.

The 10 largest holdings in SDY make up just over 20% of the total ETF. ExxonMobil (XOM) and AT&T (T) are the top two.

Selling July’s $137 call against SDY’s underlying buy could lower the net cost by about $5.00 (just under 4%), while still leaving a more than 4% upside appreciation for the short strike $137. Plus, you’ll still get more than a 2.5% dividend as long as SDY stays below $137.

DVY (iShares Select Dividend ETF)

DVY ranks #8 in the Large Cap Value ETF category.

The Top 10 positions for DVY are listed below. They make up just under 20% of the total assets. Valero (VLO) and Altria (MO) take the highest weightings.

Selling June’s $130 call against DVY’s underlying buy could lower net costs by about $4.20 (well over 3%), while still leaving about a 4% upside appreciation for the short strike of $130. Plus, you’ll still get more than a 3.3% dividend as long as DVY stays below $130.

After the recent scorching hot rise in stocks, many traders and investors are looking for lower risk yet return. Taking a more conservative covered call approach to quality, higher-yielding, lower-beta ETFs is certainly a solid way to play in a healthier way.

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All the best!

Tim Biggam

Editor, POWR Options Newsletter


SPY shares closed Friday at $402.33, down $0.09 (-0.02%). Year-to-date, SPY is down -14.31% versus a percentage increase in the benchmark S&P 500 index over the same period.


About the author: Tim Biggam

Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, 4 years as Lead Options Strategist at ThinkorSwim and 3 years as Market Maker for First Options in Chicago. He makes regular appearances on Bloomberg TV and is a weekly contributor to the TD Ameritrade Network “Morning Trade Live”. His main passion is to make the complex world of options more understandable and therefore more useful for the everyday trader. Tim is the editor of the POWR options newsletter. Learn more about Tim’s background, along with links to his most recent articles.

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