This new ETF provides a juicy dividend yield 4.09%, of paid quarterly and it adds to returns by employing a covered call strategy.
CBOE Vest S&P 500 Dividend Aristocrats Target Income Index ETF (KNG)
From Safe Money Report
It’s time to step things up a notch—to put you into a fund that’s generating income “fit for a king.” I’m talking about the CBOE Vest S&P 500 Dividend Aristocrats Target Income ETF (KNG, Rated “C-”).
KNG is a newer, $48 million ETF sponsored by CBOE Vest Financial LLC with a unique strategy. It owns shares of S&P 500 companies that have proven to not just pay, but raise, their dividends steadily and consistently for a quarter century. You heard that right: 25 years! Only around 50-60 S&P companies have been qualifying recently. In early January, the most heavily weighted stocks in the ETF hailed from a diversified mix of sectors. They included drug makers like Abbvie (ABBV, Rated “C”) and Johnson & Johnson (JNJ, Rated “B”), data provider S&P Global (SPGI, Rated “B-”) and toolmaker Stanley Black & Decker (SWK, Rated “C”).
But KNG doesn’t just collect the generous payouts from these appropriately named dividend aristocrats. The ETF also employs a “covered call writing” strategy, writing (or selling) call options on up to 20% of each stock holding. If you’re not familiar with how it works, here are some quick basics:
A call option gives its holder the right, but not the obligation, to buy an underlying stock at a specified price before a certain expiration date. Each options contract covers 100 shares of any given security, known as a round lot. When you write a call option, you receive an upfront payment—or premium—from the buyer. Effectively, you give up the right to some degree of stock price appreciation. But you get a payment up front for your trouble.
This strategy helps generate income. When you layer that income on top of the more-generous dividends that aristocrat companies pay out, you get a nice, juicy, market-beating yield. KNG’s recent yield was almost two-and-a-half-times the 1.7% yield offered by the SPDR S&P 500 ETF Trust (SPY, Rated “C+”). Plus, you can still benefit from capital appreciation in a rising market (though at a somewhat reduced rate). AND you have some downside protection in a falling market, thanks to the cushion provided by those options premiums.
Add it all up and you can see why this month, I recommend you buy a 5% position in KNG at a price of $47.25 or better.
Mike Larson, Safe Money Report, 1-877-934-7778, www.weissratings.com, January 2020