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When it delivered first-quarter results on Thursday, April 24, Google parent Alphabet (NASDAQ: GOOGL) announced a modest 5% dividend increase, taking the annual payout to 21 cents a share from 20 cents.
Hey, it’s better than nothing and, at the very least, shows the tech giant is committed to growing its dividend after initiating it a year ago. Alphabet’s payout increase, though anecdotal in the context of this article, is one example of the Magnificent Seven stocks being known for a lot of things with equity income NOT being one of them.
Two of the seven – Amazon (NASDAQ: AMZN) and Tesla (NASDAQ: TSLA) – aren’t yet dividend payers. Nvidia (NASDAQ: NVDA) barely is. Alphabet and Meta (NASDAQ: META) yield an average of approximately of 0.35%. Apple (NASDAQ: AAPL) is kind of better at 0.49% leaving Microsoft (NASDAQ: MSFT) as the king of mag 7 dividend payer in yield terms at 0.83%. To the credit of Apple and Microsoft, both have become reliable payout growth stories.
However, the broader point is the mag 7, whether on an individual basis or via the ETFs dedicated to the stocks, aren’t big income destinations, but thanks to some intrepid ETF issuers, that’s starting to change.
MABY Could Be Magical for Income
The Roundhill Magnificent Seven Covered Call ETF (CBOE: MAGY) debuted last week and it is indeed a nifty spin on income generated via those seven stocks because the new actively managed fund will make weekly distributions. That’s accomplished by writing (selling) weekly covered calls on the Roundhill Magnificent Seven ETF (CBOE: MAGS).
MAGS is a $1.89 billion ETF and the first focus explicitly on the magnificent seven stocks. MAGS has traded lower this as its holdings have struggled, but with those stocks scuffling and market volatility creeping higher, options premiums on those names have been enticing.
“MAGS has fallen 24.5% since January 1, but 10-day implied volatility rallied as high at +50 points at its peak over the same time period,” according to Roundhill research. “While the long-term outlook for these stocks is still bullish and the current market environment could be seen as an opportunity to buy at a lower price multiple, this performance highlighted the potential for a covered call approach to the Magnificent Seven stocks.”
Investors, typically those of the income-hungry, retail ilk, buy ETFs like MAGY for a simple reason: big income. Given that MAGY hasn’t been around for even a week, forecasting it’s yield and distribution rates isn’t worth it at this point, but it’s likely the rookie fund will feature a meaty distribution rate as that’s par for the course in the universe of weekly options income ETFs.
MAGY Perks, Risks
Presumably, an obvious benefit of MAGY will be a large income stream. Additionally, the new ETF could act as a hedge for investors that are long MAGS or individual magnificent seven names in their portfolios. That’s an advantage and one that should not be diminished, but there are no free lunches in investing and that’s particularly true with covered call ETFs.
“We believe MAGY is expected to outperform its underlying security, MAGS, in flat-to-down markets, and that could be an ideal time period to be long the Fund and harness volatility,” adds Roundhill.
In other words, should technology stocks rally in earnest and a new bull market is born, ETFs like MAGY will not deliver returns on par with traditional counterparts. Additionally, some critics believe that options income ETFs, many of which are just a few years old, haven’t been battle-tested across a standard recession or a bear market comparable to the global financial crisis, implying there’s no telling how these ETFs will perform should such challenges materialize. Ideally, that doesn’t happen and MAGY investors can just do what they want to do – collect big income.