Is ZWC stock a buy?

The stock hasn’t gone anywhere this past year and remains off its all-time highs, but investors might be interested in owning a vehicle like BMO Canadian High Dividend Covered Call ETF (BMO Canadian High Dividend Covered Call ETF Stock Quote, Charts, News, Analysts, Financials TSX:ZWC).

Aimed at giving shareholders exposure to dividend-focused stocks in the Canadian market, ZWC has about 40 per cent of its holdings in financials like Royal Bank and TD, 19 per cent in energy names like Enbridge and TC Energy and about ten per cent in communication services companies like Telus and BCE.

ZEG currently has $1.6 billion in assets and an annualized distribution yield of 7.5 per cent, with a management expense ration (MER) of 0.72 per cent. 

That yield is huge, making for an interesting proposition, but the stock comes with its considerations, particularly as it’s a covered call ETF.

“When you’re looking at ZWC, you’ve got to factor in that there’s a large number of very solid dividend-paying stocks and from the covered calls they’re picking up another two, two and a half points. That’s why you’re getting those [high] yields,” said portfolio manager John Hood, speaking on BNN Bloomberg last month.

A covered call is an options trading strategy that has a shareholder selling call options for which they receive a premium for the buyer’s right to buy the stock at a set price. The strategy is called covered since the shareholder still owns the underlying stock but reaps the benefits of extra income from the premium. 

At the same time, the approach limits the potential upside to the shareholder if the stock, or in the case of the ETF, stocks, go higher.

Stan Wong, a wealth management director at Scotia Wealth, says a covered call like ZWC will do less well on a relative basis during a bull run, since investors would do better by owning the companies themselves and seeing the appreciation in their share values.

“A rule of thumb with covered call strategies is if you think the markets are going to be flat or slightly negative, they’re not bad strategies to own. But if you think the markets and the underlying securities are going to go higher, just own the underlying security to get a better total return at the end of the day,” said Wong, speaking on BNN Bloomberg in 2021.

Based on 311 analysts offering ratings and targets on ZWC, the consensus rating is Hold, according to TipRanks. The Street 12-month target is $20.47, representing at press time a projected return of 17 per cent.