The Schwab U.S. Dividend Equity ETF offers a blend of yield and growth, but a lesser-known ETF with a 10.5% yield and options-based strategy is drawing attention for investors seeking higher monthly income and market outperformance
For investors seeking reliable income and long-term growth, the Schwab U.S. Dividend Equity ETF (SCHD) has become a mainstay in many portfolios. Its focus on high-quality dividend-paying U.S. stocks has delivered a combination of above-average yield and consistent dividend growth, making it a core holding for those who want to balance income with capital appreciation. Yet, as market conditions evolve and new products emerge, some investors are exploring complementary strategies that can boost income potential without abandoning the stability of established funds like SCHD.
One such alternative is the Overlay Shares Large Cap Equity ETF (OVL), which has attracted attention for its options-based approach to generating monthly income. While SCHD remains a foundational choice, OVL's higher yield and unique risk profile offer a different way to pursue income and total return.
SCHD's Role in Income Portfolios
The Schwab U.S. Dividend Equity ETF is widely regarded for its disciplined selection of 100 large-cap U.S. companies with strong records of paying and growing dividends. As of the most recent reporting period, SCHD's trailing 12-month yield stands at approximately 3.1%, roughly three times the yield of the S&P 500. The fund's holdings have increased their dividends at an average annual rate of 9.4%, supporting both current income and future growth. SCHD's low expense ratio of 0.06% and its $112 billion in assets under management further reinforce its appeal as a cost-effective, scalable solution for income-focused investors.
While SCHD's yield is not the highest available, its combination of dividend growth and total return has historically outperformed many higher-yielding alternatives, especially over longer time horizons. For investors who prioritize stability and a rising income stream, SCHD's approach remains compelling.
Options-Based Income With OVL
The Overlay Shares Large Cap Equity ETF (OVL) takes a different approach to income generation. Rather than relying solely on stock dividends, OVL employs an options overlay strategy, specifically selling put credit spreads on the S&P 500 index. This involves writing out-of-the-money put options while simultaneously buying lower-strike puts for downside protection. The net result is a stream of option premiums that can be distributed to investors as monthly income.
Unlike covered call strategies, which cap upside potential, OVL's put-selling approach allows for full participation in S&P 500 gains while generating income from the options market. Since its 2019 inception, OVL has delivered a trailing 12-month yield of 10.5%-more than triple SCHD's yield-and an average annual total return of 17.2%, outpacing both the S&P 500 and SCHD over the same period. However, this higher yield comes with increased risk, as the fund's options strategy can expose investors to losses during sharp market downturns. OVL's expense ratio is also significantly higher at 0.79%, and its asset base remains small at $411 million, which may affect liquidity and trading spreads.
Balancing Yield, Growth, and Risk
For investors considering OVL as a complement to SCHD, it's important to weigh the trade-offs. SCHD offers a diversified portfolio of dividend growth stocks with a long-term track record and low fees, making it suitable as a core holding. OVL, on the other hand, provides the potential for much higher monthly income and market-beating returns in flat or rising markets, but with greater downside risk and less predictability in income distributions.
Allocating a small portion of a portfolio to OVL may appeal to those seeking to boost income without sacrificing all upside potential. However, the fund's options overlay strategy can result in lumpier returns and sharper drawdowns during periods of market stress. Investors should also consider the impact of higher fees and the relative lack of scale compared to established funds like SCHD.
According to data from Morningstar, as of March 2024, SCHD's five-year annualized total return was 13.8%, while the S&P 500 returned 16.2% over the same period. OVL, since its 2019 launch, has averaged 17.2% annually, but its shorter track record and unique risk profile mean past performance may not be indicative of future results. Expense ratios, liquidity, and the complexity of options strategies should all factor into allocation decisions.
Understanding Options Overlay Strategies
Options overlay funds like OVL use derivatives to enhance income or manage risk, but these strategies introduce complexities that differ from traditional stock or bond investing. Selling put options can generate steady premiums in stable or rising markets, but exposes the fund to losses if the underlying index falls sharply. The use of put spreads limits the maximum loss, but does not eliminate risk. Investors should understand that options-based income is not guaranteed and may fluctuate significantly from month to month.
For those new to options overlay funds, it's essential to review the fund's prospectus, understand the mechanics of put spreads, and consider how these strategies fit within broader portfolio goals. While higher yields can be attractive, they often come with increased volatility and the potential for capital losses. As with any investment, diversification, risk tolerance, and time horizon should guide allocation decisions.
Dividend-focused ETFs and options overlay funds represent two distinct approaches to generating income. While dividend ETFs like SCHD rely on the underlying companies' ability to pay and grow dividends, options overlay funds use derivatives to supplement or replace traditional income sources. Each approach carries its own set of risks, costs, and potential rewards, and the right mix will depend on an investor's objectives and comfort with market volatility.
