A Hybrid Income Strategy

Recent FED statistics reveal that over 50% of corporate equities and mutual funds are owned by baby boomers.  As the baby boomer population ages, the significance of income investing has grown substantially.  Income strategies that leverage dividend-paying stocks offer a unique advantage, with the potential for both income and principal growth, in contrast to fixed income strategies.  In this piece, we will construct hybrid equity income strategies and make comparisons with several equity income ETFs. We aim to provide a quick performance analysis of these hybrid strategies in comparison to existing equity ETFs by harnessing the power of OdinUltra, the no-code specialized financial AI platform developed by Big Data Federation, Inc.

First, we define a large-cap income strategy: at the start of each quarter, from the S&P500, select the top 100 highest dividend-yielding stock.  From this basket, we market-cap weight the positions.  

Our first hybrid strategy will be a combination of the large-cap strategy and long QQQ (Nasdaq 100 ETF) with an allocation of 80%/20% respectively and rebalanced quarterly.  In the chart below, the performance of this portfolio is compared to DJ US Dividend 100 Index:

A popular yield enhancement technique in equity income investing involves the sale of call options. We test this idea by adding a systematic method of selling 1-mth SPY calls with a strike price 1-stdev OTM to our first hybrid strategy. In the chart below, we show the NAV performance of this combined strategy along with the performance of QQQ and DJ Dividend 100 Index for the last three years. In general, systematic call selling with fixed strike and expiration schedule contributes a slight negative return. Detailed performance results from OdinUltra show that the above call selling overlay reduced the portfolio risk by 0.5% at a cost of 2% over the three-year period.

Using OdinUltra, we can further compare performances of various strategies or combinations of strategies.  In the chart below, we show the NAV performance for the above hybrid strategy with option overlays compared to two ETFs, JEPI and QYLD.

Detailed performance metrics are available from OdinUltra. Users can also download historical as well as live positions, and NAV details for further study if so desired.

In conclusion, for investors seeking both income and principal growth while managing downside risk, there are several innovative solutions to explore.  OdinUltra enables users to swiftly build equity income strategies from baskets of dividend paying stocks and other ETFs, while also facilitating the addition of overlay strategies such as call options selling.