Financial advisors are constantly searching for investment opportunities that offer a balance between income generation and growth potential. The Cullen Enhanced Equity Income ETF (ticker: DIVP) provides an innovative solution, designed to generate higher income for investors through a dynamic call overlay while maintaining a focus on quality dividend-paying stocks.
In a conversation with The Wealth Advisor’s Scott Martin, Timothy Cordle, Managing Director and Portfolio Manager at Schafer Cullen Capital Management, offers insights into how this approach works and why it may be particularly suitable for today’s market environment.
The Origins of DIVP
The strategy behind DIVP began in 2010, at a time when dividend yields were under pressure. “We designed this strategy to try to pay additional income for our investors through the years,” Cordle explains. “We were able to find a way to add a partial call overlay to our portfolio and double our income for our investors while participating in a total return.” Launched as an exchange-traded fund (ETF) in 2024, DIVP seeks to enhance the income potential of a traditional dividend-focused portfolio through a tactical use of options.
How the Strategy Works
At its core, the DIVP ETF is structured to focus on quality and consistency. “Our underlying strategy is our high-dividend value portfolio,” says Cordle, noting that roughly 70% of the fund aligns with this approach, targeting companies known for their reliable dividends.
Cullen’s approach centers on absolute value investing, reminiscent of Graham-style principles. Instead of chasing the highest dividend yields, the strategy emphasizes dividend growth, aiming for a balance between immediate income and long-term capital appreciation.
A key aspect that sets DIVP apart is its strategic options overlay, which significantly enhances income generation. Cordle, an options specialist in Cullen’s enhanced equity income strategy, explains that by dynamically writing options on about one-third of the portfolio’s holdings each month, the fund mitigates potential risks from unexpected market events and can nearly double its dividend yield from 3.5% to about 7%. The technique is designed to increase income without compromising the potential for capital appreciation in the remaining two-thirds of the portfolio.
Why the Options Overlay Matters
Cordle emphasizes that the options overlay is not just a mechanical process of writing calls on the entire portfolio each month. Instead, it is a dynamic and carefully managed strategy. “It’s somewhat subjective in nature,” he says, “but it also allows us to properly value the underlying securities as well as the market and the sector participation of the names that we own.” The flexibility allows Cullen to adjust the level of options exposure based on market conditions, striving to minimize assignment rates and preserve the total return potential of the portfolio.
The options overlay not only enhances the dividend yield but also provides a buffer against market volatility. As Cordle says, “We think we stack up that way as a much better mousetrap than bonds.” Given the struggles of traditional fixed-income investments in the current environment, the ability in the strategy to generate a yield of 7% or more from high-quality equities can be an attractive alternative for advisors with income-seeking clients.
Suitable for Various Investor Profiles
DIVP can play multiple roles in a portfolio, depending on the investor’s needs. Although some financial advisors see it as a safe way to own equities during uncertain markets, Cordle suggests it’s also an ideal solution for retirees and near-retirees seeking both current income and long-term capital growth. He describes DIVP as “an investment for all seasons,” capable of providing reliable income while also offering the flexibility to reinvest dividends for future growth.
Clients who are living off their portfolios can benefit from the high income, while those who don’t need to spend the dividends right away can reinvest them to lower their cost basis over time. Its adaptability makes DIVP suitable for a wide range of investors, from pension plans and charitable endowments to individual retirees who need income or wish to reinvest for future gains.
The Discipline Behind Longevity
The success and longevity of Cullen’s options strategy lies in its disciplined and consistent execution. Cordle emphasizes that the firm’s approach involves a daily evaluation of each opportunity across the portfolio. “We consider every option opportunity on every name that we might be able to cover,” Cordle says, noting that this methodology includes assessing the broader macroeconomic picture to ensure the strategy fits within Cullen’s dividend schedule and avoids any conflicts. The meticulous screening process is key to the long-term success of the strategy, allowing it to consistently deliver results.
For many advisors, one challenge in discussing options strategies with clients is the perception that options are too risky or complex. Cordle acknowledges this concern but emphasizes that Cullen’s approach is designed to be straightforward and methodical: “I’m delighted to be boring when it comes to investment,” he says, noting the rewards rooted in a focused, disciplined approach.
“We’re a patient, long-term quality investment advisory,” he says. “It is a daily task, and it’s actually a pleasure to do that, looking at the long-term results.”
Total Return: Dividends and Premiums
Ultimately, the goal of DIVP is to provide a total return that combines dividend income, dividend growth, and premiums from the options overlay. “The premiums become the fourth way that the portfolio actually adds value and accrues,” Cordle explains. By adding this extra layer of income, the fund is able to significantly enhance its yield without sacrificing the potential for long-term capital growth.
For advisors, this strategy offers a powerful tool in managing client portfolios, especially in an environment where traditional income strategies may be underperforming. As Cordle points out, “We’ve exceeded our 7% goal every year since inception—and comfortably.”
A Flexible, High-Income Solution
As financial advisors look for ways to generate income for their clients without sacrificing growth, the DIVP ETF offers a compelling solution. Combining high-quality dividend stocks with a dynamic options overlay, DIVP is designed to deliver a higher yield than traditional equity income strategies, while maintaining a focus on long-term total return.
Whether used as a core holding or a supplementary strategy, DIVP can provide a flexible solution for a wide range of client profiles, particularly those seeking income in retirement or looking to reinvest dividends for future growth. With a disciplined, patient approach, Cullen’s team ensures that the fund continues to deliver strong results in a variety of market environments.
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Additional Resources
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Disclosures
The Fund’s holding and sector allocations may change at any time due to ongoing portfolio management. References to specific investments should not be construed as a recommendation by the Fund or Cullen Capital Management to buy or sell the securities.
Investing involves risk. Principal loss is possible. Foreign investments involve additional risks, which include currency exchange-rate fluctuations, political and economic instability, differences in financial reporting standards, and less-strict regulation of securities markets.
The Fund may invest in derivatives, which are often more volatile than other investments and may magnify the Fund’s gains or losses. Derivatives are also subject to illiquidity and counterparty risk.
The Fund’s investment objectives, risks charges and expenses must be considered carefully before investing. The prospectus contains this and other important information about the investment company. Read it carefully before investing.
The Cullen Enhanced Equity Income ETF is distributed by SEI Investments Distribution Co. (SIDCO).
