DIVO: Blue-Chip Portfolio Yielding 4.8% (NYSEARCA:DIVO)

The Amplify CWP Enhanced Dividend Income Fund (NYSEARCA:DIVO) gives investors exposure to a curated portfolio of high quality blue-chip companies with a history of dividend and earnings growth.

The fund has strong historical returns and is currently yielding 4.8%. I believe it may be suitable for income-oriented investors.

Fund Overview

The Amplify CWP Enhanced Dividend Income Fund is an actively managed ETF that gives investors exposure to large-cap companies with a history of dividend growth. The fund also has a tactical call writing strategy on individual stocks. DIVO has over $2.5 billion in assets and charges a 0.55% expense ratio (Figure 1).

Strategy

DIVO’s stock selection strategy focuses on blue-chip stocks with a history of earnings and dividend growth. First, the manager, Capital Wealth Planning (“CWP”) screens the investment universe for companies with strong historical dividend and earnings growth. Then, CWP decides what sectors to over- or under-weight. Finally, a portfolio of 20-25 stocks is selected (Figure 2).

The DIVO ETF also tactically write covered calls on individual stocks to generate additional income. The end result is a portfolio that benefits from the capital appreciation of the core portfolio and pays 2-3% in annual dividend income plus an additional 2-4% in premium income from selling covered calls (Figure 3).

Portfolio Holdings

Figure 4 shows DIVO’s current sector allocation. The fund’s largest sector weights are healthcare (21%), energy (13%), technology (13%), and financials (12%).

Note that relative to the market as represented by the SPDR S&P 500 ETF Trust (SPY) as shown in figure 5, the DIVO fund has large overweights in healthcare (21% vs. 15%) and energy (13% vs. 5%) and a large underweight in technology (13% vs. 26%) and communication services (2% vs. 8%).

Although DIVO is a concentrated fund with only 20-25 holdings (it currently has 23 positions), the individual positions are more equal-weighted, with position weights ranging from 1.7% to 5.4% and averaging 4.0% (Figure 6).

Returns

The DIVO ETF has performed well since inception in late 2016, with impressive 3 and 5Yr annualized returns of 11.0% and 10.5% respectively to December 31, 2022. Despite markets suffering a steep drawdown in 2022, the DIVO ETF was relatively unscathed with a -1.5% return (Figure 7).

Distribution & Yield

As designed, the DIVO ETF pays a high distribution, with a trailing 12 month distribution of $1.71 or a trailing yield of 4.8%. DIVO’s distribution is paid monthly and Seeking Alpha grades DIVO’s distribution a B+ (Figure 8).

DIVO’s distribution has also grown at an impressive 22.2% CAGR in the past 5 years, although the 3Yr CAGR is much slower at 1.2%. Investors should note the 3Yr dividend growth CAGR rate is skewed lower by a special distribution of $0.86 / share that was paid in 2019.

DIVO vs. SCHD; Active vs. Passive

Judging by the information and facts I have reviewed so far, the DIVO looks like an exceptional fund. It has generated high historical returns and was able to navigate the challenging 2022 period relatively unscathed. It pays a high distribution yield that has been growing at a fast pace. The one question I have in my mind is how does the DIVO ETF compare, relative to my current high dividend pick, the Schwab U.S. Dividend Equity ETF (SCHD)?

Figure 9 shows a comparison of DIVO vs. SCHD using my proprietary scorecard. The DIVO ETF is an active ETF and charges a much higher expense ratio, which is understandable.

In terms of returns, we can see that SCHD has performed better historically, although DIVO outperformed during 2022.

On volatility and risk, the DIVO ETF has lower volatility and a smaller maximum drawdown. Despite having lower returns, its lower volatility allows it to edge out SCHD on the Sharpe Ratio (i.e. DIVO has slightly better risk adjusted return).

DIVO also has a higher dividend yield because it generates additional premium income from writing calls, and its distribution has grown at a faster rate.

All-in-all, the DIVO ETF is a fine challenger to the SCHD. For income-oriented investors, its higher distribution yield may outweigh the lower historical returns and higher fees.

Possible Risk With DIVO

For me, if there is to be any criticism of the DIVO ETF, it will have to be on the active nature of its investment process. Having been a fund manager myself, I can tell first hand that it is extremely difficult to outperform over the long run, year-after-year.

According to a recent FT article, “over the decade to mid-2022 a mere 12 per cent of US equity funds beat the market.” Academic studies show that very few active managers are able to consistently outperform their peers and benchmarks.

Active managers have biases, strengths, and weaknesses. What works in one environment may not work in another. For example, while DIVO has an outstanding performance track record over 5 years, YTD to January 20, 2023, the fund has been flat and is ranked in the 100th percentile.

While this underperformance is likely due to the short measurement period (3 weeks), it does highlight a potential risk.

Furthermore, writing call options expose the fund to right tail risk, i.e. individual stocks may rally significantly due to some unforeseen news or event (takeover for example), and the fund misses out because it has sold the ‘upside’.

Conclusion

The DIVO ETF gives investors exposure to a curated portfolio of high quality blue-chip companies with a history of dividend and earnings growth. The fund has delivered strong historical returns, including being relatively unscathed from a challenging 2022. It is currently yielding 4.8% from a combination of portfolio dividends and premium income from writing calls. I like the DIVO ETF and believe it may be suitable for income-oriented investors.