Like a lot of investors, I bought into shares of the Nasdaq Covered Call ETF, ticker QYLD, attracted by that amazing 12.2% dividend yield.
Twelve percent return a year plus the growth of tech stocks in the Nasdaq…what could go wrong?
But then I started noticing something that destroyed my confidence in it. The fund didn’t save me from the selloff in 2018 with a loss of 15%, twice the loss of tech stocks.
Then the QYLD returned just 10% in 2019 while the broader Nasdaq index jumped 31%…even with that dividend yield, I was missing out big time.
Since then, the QYLD has underperformed the Nasdaq by another 50%…that’s in less than two years!
You broke my heart QYLD!
But the fund is still popular and investors screamed I was crazy when I highlighted five monthly dividend stocks, I liked better than the Nasdaq Covered Call ETF, the hugely popular QYLD.
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In the six months since, all five stocks have beaten the QYLD by an average 29%! Even if you remove the 85% runaway return on shares of SBR in blue here, the four monthly dividend stocks beat the QYLD by an average of 9% along with great dividend cash flow.
Well, now I’ve found five quarterly dividend stocks that I like just as much, five dividend payers that beat the Nasdaq Covered Call ETF.
Not only do these five dividend stocks pay an average yield of 12.3%, all five have beaten the QYLD on returns this year, some by as much as 75%!
They’ve also grown their dividend yield by an annual rate of 48% over the past five years while the QYLD dividend has gone nowhere!
Now don’t think I’m trashing on the QYLD. It can still have a place in your portfolio if you just like that monthly dividend and don’t care about returns but just keep an open mind because I see too many investors chasing this dividend ETF when they can get stronger returns, higher dividends and just a better investment in other stocks.
Investors love the Nasdaq Covered Call ETF for its 12.2% dividend yield and with monthly cash flow so you get about a 1% cash return each month.
The fund uses a covered call strategy on the Nasdaq 100 index, that’s the 100 largest companies in the tech-heavy Nasdaq. So, what it’s doing here is it’s buying the 100 stocks in this index, mostly large technology companies, and then it’s selling call options against them.
Call options give an investor the right to buy a stock at a certain price up to a set date and for that right, they pay the other investor a premium up-front. For example, if I owned shares of Tesla but were worried it might come down from the current $800 share price…or if I just wanted to create a cash flow from this non-dividend paying stock, I could sell a call option to another investor.
Looking at the stocks in the fund, it’s a who’s who of big tech companies with more than half a billion dollars in shares of Apple alone along with Amazon and Microsoft but if you scroll down, you see not all these are tech stocks. You’ve got some shares of Comcast and Pepsi as well because they’re in that Nasdaq 100 index.
Now what you don’t see here though you can see all the fund holdings on its website, is the covered call strategy, so what is it selling to offset some of the risk and generate cash.
We see this going to the fund website and clicking to download all holdings. Here we see all 102 stocks held in the fund and the market value, all the way from $847 million in shares of Apple to $7.8 million in shares of Constellation Energy for a total fund asset of just over $6.8 billion.
And it’s here in this last line that we see the covered call strategy. The fund has sold calls against the Nasdaq index expiring in a month for a market value of $222 million which is about 3.3% of the total fund assets.
It sounds like a win-win scenario but the fund has lost 30% of its value over the past five years, underperforming stocks in the Nasdaq index by more than 120%! Even reinvesting your dividends, you would have been 74% better off just investing in the index than in the QYLD.
I want to get into our list of dividend stocks so I’ll wait until later to show you how these five stocks solve the problems in the QYLD. I’ll also show you how to still get that monthly dividend cash flow with quarterly stocks like these!
I highlighted Devon Energy, ticker DVN, as one of my favorite dividend stocks back in 2020 when it was at $16 a share. It’s now up 300% but is still one I hold in my portfolio.
Devon is a leading oil producer in three states; North Dakota, Texas and Delaware. With oil spiking over the last two years, these assets have become cash flow machines and like most oil companies, Devon is choosing to return that cash to shareholders rather than acquiring assets at higher prices.
Free cash flow quadrupled since its merger with WPX last year and is forecasting even stronger cash flow this year. The company is break-even at a price of just $30 per barrel, well under the $80-plus oil has been at and is likely to stay this year. At $85 per barrel oil, the company will grow free cash flow by 14% this year and prices could fall 65% to that $30 a barrel before the company is operating at a loss.
This all helped Devon increase its share buyback program recently to $1.6 billion, nearly triple what it bought back last year, and continue a history of dividend growth.
To find the dividend history and dividend growth rate on each of our stocks, we’ll be using the Historical Data tab here on Yahoo Finance. Click through and change the time period to five years and to show dividends only.
Here can see when Devon has paid a dividend in the past, it’s most recent dividend of $1.55 per share and if we scroll down that it’s increased the dividend from just $0.06 five years ago. That is a 2400% increase in the dividend payment!
Now don’t think you’re going to see that same dividend increase over the next five years but oil stocks are cash machines right now and should continue to churn out cash for years. Even after the situation with Russia and Ukraine, oil prices will stay high because the world just hasn’t developed enough production over the last few years. That’s going to mean higher dividend yields for stocks like Devon Energy.
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Next on our dividend stocks list, CVR Partners, ticker UAN, at 16.3% has one of the highest dividend yields in the group and well above the QYLD.
CVR is a leading producer of nitrogen fertilizer with facilities in the Midwest and production of 1.6 million tons a year. It has facility capacity from both natural gas and coal which allows it to take advantage of energy prices. Grain prices hit records earlier this year and a rising global population is driving food demand. The graph on the lower-left here shows arable land per capita dropping consistently for decades and with increasing food demand, that means increased use of fertilizers to boost crop yields. Global nitrogen demand is expected to increase by half a percent annually through 2030 and could go even higher.
CVR Partners has only been paying a dividend since 2019 but has increased it by 737% over the period, from $1.20 per share to $10.05 paid out in August.
I’ll show you how these five stocks fix the problems in the QYLD later but I know a lot of you out there are still saying, ‘Yeah, but the covered call ETF pays monthly! What if I need that monthly cash flow?’
Well look at the payout months for these five stocks together. You still get that monthly cash flow and some months as many as three dividend payments. That’s all on top of the dividend growth and the price return!
Sunoco, ticker SUN, is one of the lower yields on the list at 8.3% but that could change soon and the price return has beaten the QYLD by 60% over the last five years.
Sunoco is the largest fuel distributor in the U.S. serving more than 10,000 convenience stores, dealers and commercial customers. With most of my energy stocks in the production space, I like Sunoco as an investment that’s closer to the consumer for that supply chain diversification.
The company is expanding its midstream footprint with 10 more terminals and 15 billion barrels of storage capacity which fills the gap in its business for that part of the supply chain but it’s still more of a consumer fuel play.
I haven’t covered the fundamentals as much in this video but Sun is really well positioned here for any type of market. Debt leverage is at a five-year low and the coverage ratio, or how well earnings cover the dividend, has jumped since 2017. That’s leaving plenty of room for reinvestment and growth or could be an opportunity to send more cash back to shareholders.
Sunoco is one of only two stocks on our list besides that QYLD with no dividend growth, choosing to hold the dividend at $0.82 per share. With that high coverage ratio though, I wouldn’t be surprised if it ups its share repurchases or increases the dividend to return more cash.
We’ve still got two more dividend stocks to highlight, one with a yield over 15%, but first I want to personally invite you to get the Weekly Bow Tie, our free weekly newsletter with all the stock market news, strategies and trends you need to know. Each week, before the market opens, I’ll show you what I’m watching and the stocks that could highlight the week. It’s all totally free, just something I like to do for you out there in the community so look for the sign-up link below.
Fourth on our dividend list is one of the most interesting opportunities for investors, shares of Icahn Enterprises, ticker IEP.
IEP is the holding company for Carl Icahn’s investments and businesses in energy, industrials, auto parts, real estate and pharmaceuticals. Owning or using controlling shares in some strong companies like PepBoys, CVR Energy and Vivus.
What’s really exciting about this though is the ability to invest alongside Carl Icahn, the original corporate raider of the 80s. For the old farts like myself, guys like Pickens, Henry Kravis and yes even the fictional Gordon Gekko…these guys made you want to slick your hair back and start wearing suspenders.
Icahn’s history is one of the most interesting stories in investing, starting with his first takeover attempt of Tappan in 1978, forcing the sale of the company to Electrolux for a $2.7 million profit. Even his unsuccessful takeovers like the ’86 bid for U.S. Steel make money. He dropped his bid in ’91 making $200 million on a $1 billion investment.
The usual strategy is Icahn buys up the stock or company’s debt for a controlling share. He then pushes the management to change management, spinoff assets or outright sell the company. The ability to move billions of dollars around quickly means company directors take him seriously and even when he’s not able to force a change, a lot of times the company will pay him a premium on his investment just to make him go away…it’s a win-win strategy Icahn has perfected to make billions.
Nothing is too impressive compared to the 25X increase in Devon’s dividend but IEP has managed to increase its own dividend from $1.50 to $2 per share over the last five years. That’s still a respectable 5.9% annual increase in the payout and the yield now is 15.6%…well above the covered call ETF.
Before I reveal that last dividend stock, again I’m not just trying to trash the QYLD. In fact, I used to own shares in the Covered Call ETF but there were so many problems that I went looking for these alternatives, dividend stocks that could give me the cash flow but without the problems.
First, because the QYLD follows an index, that Nasdaq 100 list of stocks, the best return you will ever get is the index return. That might be fine over the last five years when the index more than doubled but what about the 14 years it took to get back to its 2000 high? More than a decade of losses?
By picking individual dividend stocks, you’ve got a chance to invest in companies like Devon Energy that have returned 85% this year even as the market crashes.
One of the biggest problems I had with the QYLD when I owned shares, besides the fact it always seemed to underperform the Nasdaq in returns, was the fact the dividend went nowhere. The dividend amount has been stuck at $0.22 a share for eight years.
It’s still a good yield but one of the best things about dividend stocks is that growing payment. For example, if you were to buy shares of Devon Energy in June of 2020, you would have paid $10.80 per share and be collecting the $0.11 per share dividend each quarter. But with the amazing dividend growth over the past two years, that dividend is now $1.55 per share every quarter, and would work out to a 57% annual dividend yield on your original investment!
And while it not seems like much, that 0.6% expense fee you pay to management every year to hold shares of the QYLD, it adds up! This shows the value of two portfolios over 20 years of investing, each investing $500 a month and earning a 10% annual return. The only difference, one invests in an ETF and loses that 0.6% expense fee like investors do in the QYLD while the other is in individual stocks. Now I know 0.6% may not seem like much if it saves you the time investing but I’ll take my $22,000 and spend it on avocado toast for the next 20 years.
USA Compression Partners, ticker USAC, not only pays an 11.8% dividend yield but has beaten the QYLD by 45% over the last five years.
USAC does one thing and it does it very well. The company provides compression services for natural gas producers, allowing the gas to be moved through pipelines. Focusing on just this small part of the midstream component makes USAC the go-to for services and removes a lot of the reliance on natural gas prices.
You see that volatility in natural gas prices here in the red line jumping up and down but look at the green and blue bars, adjusted earnings for the company. USAC has been able to drive stable and growing earnings even in the worst times for nat gas because it’s built a business based on demand, not price.
And demand for natural gas is expected to jump 28% over the next 30 years with US exports rising more than five-fold.
The company has paid out a consistent dividend of $0.525 per share quarterly since 2015 and returned over a billion to investors since the IPO.