In the recent webcast, In times of uncertainty, this game can unlock opportunities, Bill Belden, president of Amplify ETFs; Kevin Simpson, founder and CIO of Capital Wealth Planning, LLC; and Jane Edmondson, founder and CEO of EQM Indexes, argued that in times of uncertainty, the need to generate monthly income becomes a priority, but it’s also important to stay ready for any upcoming rally. Investors can play a defensive play that can also provide healthy monthly income stream potential.
Investors in need of current income struggle to find viable solutions. Current low rates make it difficult to generate material income. The size of income often takes priority over excess income growth, resulting in long-term problems. Meanwhile, upside potential could be lost if investors depend too much on bonds for their income.
As a result, strategists highlighted two strategies for addressing this current income challenge: Look for companies with a history of earnings and growing dividends combined with covered call option premiums.
In particular, they highlighted the Amplify CWP Enhanced Dividend Income ETF (DIVO)which owns high-quality large-cap companies with a history of dividend and earnings growth, coupled with a tactical covered call strategy on single stocks, and the Amplify International Enhanced Dividend Income ETF (NYSE Arca: IDVO), which seeks to provide monthly income from international dividend-paying stocks in the form of American Depository Receipts (ADRs) and opportunistically underwriting covered calls on those stocks. The combination of capital appreciation potential, dividend potential and an estimated 2% to 4% option premium could help investors capture upside potential, reduce portfolio risks and generate annual income from two sources.
“Today’s high level of volatility could lead to higher premiums on a well-executed covered call strategy. Our tactical approach to writing covered calls seeks to improve investment income whether markets go up, down or sideways,” according to Amplify ETFs.
Furthermore, the strategists pointed out that investors can also fight inflation by owning companies with a history of growing their earnings and dividends, a feature of the DIVO/IDVO selection process.
Along with these two strategies, Amplify ETFs also recently launched the Amplify Natural Resources Dividend Income ETF (NDIV) to help income-oriented investors diversify into the natural resources segment. NDIV invests in US-traded American Depository Notes (ADRs) or over-the-counter (OTC) traded stocks of global natural resources and commodity-related companies, which include energy, chemicals, agriculture, metals and mining, paper products and to cover with wood.
The US energy industry continues to enjoy forward momentum despite continued calls to transition away from dirty fossil fuels. The energy and metals markets were driven by a recovery in demand in line with the energy transition from “old energy” to more environmentally and carbon-friendly forms of “new energy”.
On the supply side, the sector has seen years of underinvestment, which have been prolonged by increased attention to ESG principles. Having been burned in the past and facing the long-term secular decline of fossil fuels linked to the energy transition and ESG regulatory headwinds, energy companies have little interest in capital investments. Instead, many have chosen to buy back shares or raise dividends to reward investors.
Furthermore, the strategists added that the current high inflation also favors commodity prices. Even looking beyond, long-term supply-demand dynamics continue to support the commodity supercycle theme. Investors should consider a natural resources dividend strategy now because inflation is at its highest level in 40 years. To curb inflation, central banks are raising interest rates, which has spurred the worst bond market performance in 40 years and derailed 60/40 allocations. Income investors are in desperate need of investment solutions that provide a source of return that keeps pace with inflation.
“The current inflationary environment of high energy and commodity prices, natural resources and commodity-linked equity companies is in the ‘golden age’ of free cash flow,” according to Amplify ETFs. “Because these companies aren’t spending money on new capabilities, balance sheets are becoming debt-free and free cash flow is being returned to shareholders in the form of 1. increasing fixed dividends, 2. high variable or special dividends, and 3. share buybacks ”.
Financial advisors interested in learning more about dividend generation can watch the webcast here on demand.