Can Covered Calls on SPY Replicate Dividend Aristocrat Income?

Is it essential to focus on Dividend Aristocrats when seeking a steady income? Our analysis of covered call strategies on SPY and NOBL suggests a more nuanced answer: the maturity of the options, the distance from the strike price and the frequency of rollovers can significantly affect the outcome.

First published on CAPAnalysis Expert View.

Covered calls or Dividend Aristocrats?

Investors seeking regular income often turn to Dividend Aristocrats because of their history of maintaining and increasing distributions. But a covered call strategy can also produce recurring cash flows while retaining exposure to the underlying asset. This raises two questions:

1. Could conservative covered calls on SPY have generated income comparable to the dividend yield of a Dividend Aristocrats ETF, while preserving more of SPY’s capital appreciation?
2. If an investor already wishes to hold Dividend Aristocrats, could those securities themselves provide a suitable basis for a covered call strategy?

Scope and methodology

Systematic covered call strategies were tested on the SPDR S&P 500 ETF Trust (SPY) and the ProShares S&P 500 Dividend Aristocrats ETF (NOBL) from 15 July 2021 to 15 July 2026. Strikes ranged from 1% to 10% out of the money; maturities from one week to six months for SPY and from one month to one year for NOBL, which has monthly listed options only. A new call was written whenever the preceding position expired or was rolled, rather than terminating the strategy after an assignment.

Figures are gross of transaction costs, bid-ask spreads, taxes, market impact and other expenses. These matter most for shorter-dated strategies, which require more frequent execution.

Understanding the results

Each strategy is defined by its tenor and its strike distance from spot. The principal figure is its annualised return relative to a passive holding of the underlying ETF; the secondary figure is the monthly Sortino ratio. A positive figure means the calls’ income more than compensated for the capital appreciation surrendered above the strike; a negative figure means it did not.

This distinction is essential: option premiums are cash income, but they should not be treated as additional return without considering the limit placed on the portfolio’s upside.

Underlying	Total return	Annualised return
SPY	87.6%	13.4%
NOBL	54.9%	9.1%

Could SPY covered calls provide income comparable to Dividend Aristocrats?

Several SPY covered call configurations generated gross option premiums within the same general range as NOBL’s dividend yield of approximately 2%. The more relevant question is whether those premiums were sufficient to compensate for the upside surrendered.

Short-dated SPY strategies

The strongest backtested results were concentrated in relatively short-dated options:

Strategy region	Relative to SPY	Monthly Sortino	Gross annualised return
1 week, 1% to 3% OTM	+3.0% to +3.5%	1.92 to 2.43	16.4% to 16.9%
2 weeks, 2% to 5% OTM	+2.2% to +3.5%	2.00 to 2.33	15.6% to 16.9%
3 weeks, 4% to 8% OTM	+2.0% to +2.7%	1.74 to 2.03	15.4% to 16.1%

Over the period, these configurations did more than generate income: they outperformed a passive investment in SPY. However, the strongest figures were identified retrospectively within a broad parameter grid, and weekly and biweekly calls are the most demanding to implement, with frequent rolling and greater exposure to spreads, taxation and execution timing.

Longer-dated SPY strategies

For a less operationally intensive approach, maturities between one and three months may be more practical:

Strategy region	Relative to SPY	Gross annualised return
1 month, 8% to 10% OTM	+1.9% to +2.0%	15.3% to 15.4%
2 months, 5% to 8% OTM	+1.3% to +1.7%	14.7% to 15.1%
3 months, 6% to 10% OTM	+1.7% to +2.5%	15.1% to 15.9%

By contrast, almost the entire six-month row underperformed SPY, from -5.9% to +0.2% annualised. For SPY, favourable results were therefore concentrated between one week and three months.

Are Dividend Aristocrats suitable covered call underlyings?

NOBL reveals a different pattern: positive relative performance across almost the entire parameter grid, including longer-dated strategies requiring substantially fewer option cycles.

Monthly NOBL strategies

The strongest monthly region was between 3% and 10% out of the money, at +3.4% to +4.1% annualised relative to NOBL:

Strategy	Relative to NOBL	Monthly Sortino
1 month, 6% OTM	+4.1%	1.22
1 month, 4% OTM	+3.9%	1.25
1 month, 8% OTM	+3.8%	1.18

These strategies generated gross annualised returns of 12.5% to 13.2%, against 9.1% for holding NOBL.

Longer-dated NOBL strategies

Strategy region	Relative to NOBL	Gross annualised return
3 months, 3% to 10% OTM	+1.9% to +2.9%	11.0% to 12.0%
6 months, 2% to 4% OTM	+3.1% to +3.8%	12.2% to 12.9%
6 months, 5% to 10% OTM	+2.7% to +3.1%	11.8% to 12.2%

The one-year NOBL strategies also remained positive, although the advantage narrowed to +0.3% to +1.9%.

The two strongest NOBL configurations came close to SPY’s passive return:

Strategy	Gross annualised return
NOBL buy and hold	9.1%
NOBL covered calls, 6 months and 3% OTM	12.9%
NOBL covered calls, 1 month and 6% OTM	13.2%
SPY buy and hold	13.4%

The six-month, 3% OTM strategy (monthly Sortino 1.60) finished only 0.5 percentage points below SPY while requiring just two option cycles per year. This does not mean the strategies carried equivalent risks or exposures, but it illustrates how much option income reduced the return gap between the two ETFs.

SPY and NOBL behaved differently

SPY generated some of the strongest results in the study, but concentrated in short-dated options, with performance becoming less consistent as maturity increased. NOBL was more consistent across the grid, with favourable results in the monthly, three-month and six-month regions.

The highest backtested return is not necessarily the most suitable strategy. A weekly strategy involves about 52 option cycles per year, a six-month strategy only two: less time managing the position, fewer commissions and spread crossings, and less sensitivity to execution. NOBL’s positive results across neighbouring strikes and multiple maturities may indicate greater historical robustness within the tested range, though not outside the period examined or under different market conditions.

Conclusion

The results do not establish that SPY covered calls can replace Dividend Aristocrats in every portfolio. Dividend income comes from company distributions, whereas covered call income is obtained by surrendering part of the portfolio’s potential appreciation, and the two differ in risk, tax treatment and operational requirements. Nevertheless, over the period examined:

• selected SPY covered calls generated option income comparable to NOBL’s dividend yield without changing the underlying investment, and several one-to-three-month configurations also outperformed SPY;
• SPY’s strongest results were in shorter maturities, where costs and execution quality matter most;
• NOBL produced more consistent results across maturities and strike levels, and its three-month and six-month strategies may have offered a more practical balance of income, total return and ease of management;
• covered calls reduced a substantial part of the performance gap between NOBL and SPY.

These conclusions are specific to the selected period, data and assumptions, and should be understood as an examination of historical strategy behaviour rather than a recommendation to implement any particular covered call strategy.

This publication is provided for informational purposes only. It does not constitute investment advice, an offer or a recommendation to buy or sell any financial instrument. Past and simulated performance is not indicative of future results.