How To Lower Your Risk With A Conservative Covered Call Approach On 3 Strong Buy Dividend-Paying ETFs

How To Lower Your Risk With A Conservative Covered Call Approach On 3 Strong Buy Dividend-Paying ETFs

Selling covered call on conservative dividend-paying ETFs can lower your risk while still providing real returns for savvy investors and traders.



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The recent drop in 10-year Treasury yields back well below the 4% level has made dividend paying stocks comparatively more attractive once again. Higher yield stocks will be a solid option in the months ahead, as the Fed is closer to the end of the rate hikes than at the beginning. Buying a higher yielding ETF is safer than trying to choose individual stocks. These are three A-rated – Strong Buy – Dividend funds you might consider buying along with a covered call to sell.

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

These three ETFs all have below market risk (lower than 1. 00 beta) and below market valuations on both Price to Earnings (P/E) and Price to Sales (P/S) basis. They each carry a bigger dividend yield than the S&P 500 as well. They are generally safer than the overall market. A quick comparison of the three dividend ETFs versus the S&P 500 is shown below.

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

Each one of the three highest yielding ETFs has a different component that makes up the overall stock basket. You can see that Exxon Mobil (XOM), the oil giant, is a major component of all three ETFS. However, each fund has a slightly different ranking and weighting. Let’s take a look at the three.

VYM (Vanguard High Dividend Yield ETF)

VYM has a Price to Earnings (P/E) ratio of just over 14 (14. 09) and Price to Sales (P/S) ratio just north of 2 (2.06). Both are at a discount to the similar metrics for the S&P 500 of 18. 43 for P/E and 2. 96 (P/S). The beta for VYM is 0. 85 so a lower risk than the overall market. It has a yield of 3. 02%, well above the S&P 500 yield of just 1.64%. It is ranked number 3 in the Large Cap Valu ETF category.

The top 10 holdings in VYM account for over 23% of the total assets. Johnson and Johnson (JNJ), and J.P. Morgan are the top two.

Selling the July $116 call against the underlying purchase of VYM can reduce the net cost by about $5. 00 (over 4%) while still leaving an upside appreciation of roughly 3% open to the short strike of $116. Plus you still get over 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 biggest 10 holdings in SDY make-up just over 20% of the overall ETF. ExxonMobil and AT&T are the top two.

Selling the July $137 call against the underlying purchase of SDY can reduce the net cost by about $5. 00 (just under 4%) while still leaving an upside appreciation of over 4% open to the short strike of $137. Plus you still get over 2.5% dividend as long as SDY stays below $137.

DVY (iShares Select Dividend ETF)

DVY holds the number 8 spot in the Large Cap Value ETF category.

The Top 10 holdings for DVY are shown below. They are just less than 20% of the overall assets. Altria (MO), Valero (VLO), and Altria(MO) have the highest weightings.

Selling the June $130 call against the underlying purchase of DVY can reduce the net cost by about $4. 20 (well over 3%) while still leaving an upside appreciation of about 4% open to the short strike of $130. Plus you still get over 3.3% dividend as long as DVY stays below $130.

Many investors and traders are now looking for lower risk while still retaining their return after the recent stock market boom. A more conservative covered call approach to quality, higher-yielding, lower beta eTFs is a solid way for investors and traders to play in a safer way.

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All the Best!

Tim Biggam

Editor, POWR Options Newsletter


SPY shares closed at $402. 33 on Friday, down $-0. 09 (-0.02%). Year-to-date, SPY has declined -14. 31%, versus a % rise in the benchmark S&P 500 index during 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 a Market Maker for First Options in Chicago. He is a regular contributor to the TD Ameritrade Network’s “Morning Trade Live” and makes frequent appearances on Bloomberg TV. His passion is to make the complex world easier to understand and more useful for everyday traders.

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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