Financial Risk

Can Covered Calls on SPY Replicate Dividend Aristocrat Income?

Imran HUSEIN · July 23, 2026 · 6 min read

Is it essential to focus on Dividend Aristocrats when seeking a steady income? Our analysis of several 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. Discover our new Expert View.

Covered Calls or Dividend Aristocrats: A Comparative Approach to Income Generation

Investors seeking regular income from equity portfolios often turn to dividend-focused strategies. Dividend Aristocrats, in particular, are commonly viewed as an attractive solution because of their history of maintaining and increasing distributions.

However, dividends are not the only means of generating income from an equity portfolio. A covered call strategy can also produce recurring cash flows while allowing the investor to retain 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?

To examine these questions, systematic covered call strategies were tested on both the SPDR S&P 500 ETF Trust, SPY, and the ProShares S&P 500 Dividend Aristocrats ETF, NOBL.

Scope and methodology

The analysis covers the period from July 15th 2021 to July 15th 2026.

For each underlying, calls were written systematically using different combinations of:

• option tenor;
• strike distance from the prevailing spot price;
• predetermined rolling frequency.

Strike prices ranged from 1% to 10% out of the money. The maturities tested ranged from one week to six months for SPY and from one month to one year for NOBL.

NOBL has monthly listed options only. Its analysis therefore begins with a one-month tenor.

The strategies were rolled systematically throughout the period. The analysis assumes that a new call was written when the preceding position expired or was rolled, rather than terminating the strategy following an assignment.

Unless otherwise stated, the figures are presented gross of:

• transaction costs;
• bid-ask spreads;
• taxes;
• market impact;
• operational or advisory expenses.

These factors are particularly important for shorter-dated strategies, which require more frequent execution.

Understanding the results

The heatmaps compare each systematic covered call strategy with a passive investment in the corresponding underlying ETF.

For each heatmap:

• the columns represent the strike distance from spot, from 1% to 10% out of the money;
• the rows represent the option tenor;
• the principal figure shows the strategy’s annualised return relative to a passive holding of the underlying;
• the secondary figure shows the monthly Sortino ratio.

A positive figure indicates that the covered call strategy outperformed the underlying ETF over the period examined. A negative figure indicates that the income generated by the calls was insufficient to compensate for the capital appreciation surrendered when the underlying price exceeded the relevant strike.

This distinction is essential. Option premiums constitute cash income, but they should not be treated as additional economic return without considering the corresponding limitation placed on the portfolio’s upside.

Over the period examined, the underlying ETFs generated the following returns:

Could SPY covered calls provide income comparable to Dividend Aristocrats?

The first question was whether an investor seeking an income stream of approximately 2% would necessarily need to replace SPY with a Dividend Aristocrats ETF.

The separate income analysis indicates that several SPY covered call configurations generated gross option premiums within the same general range as NOBL’s dividend yield of approximately 2%.

However, comparing the cash flows alone would be incomplete. A covered call premium is received in exchange for limiting participation in any increase in the underlying asset above the strike price. The relevant question is therefore whether the premiums received were sufficient to compensate for the upside surrendered.

Short-dated SPY strategies

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

Based on SPY’s annualised passive return of 13.4%, these regions produced gross annualised covered call returns of:

• 16.4% to 16.9% for the selected one-week strategies;
• 15.6% to 16.9% for the selected two-week strategies;
• 15.4% to 16.1% for the selected three-week strategies.

Over the period examined, these configurations did more than generate cash income. They also outperformed a passive investment in SPY.

This result should nevertheless be interpreted carefully. The strongest figures were identified retrospectively within a broad parameter grid. They do not establish that the same combinations of tenor and strike would outperform in a different market environment.

Short-dated strategies are also the most demanding to implement. Weekly and biweekly calls require frequent rolling, a larger number of transactions and greater exposure to bid-ask spreads, taxation and execution timing.

Longer-dated SPY strategies

For investors seeking a less operationally intensive strategy, maturities between one and three months may provide a more practical basis for analysis.

Some of the stronger regions within this range were:

These results suggest that, during the period examined, certain moderately out-of-the-money SPY covered calls generated additional income without eliminating SPY’s underlying growth advantage.

By contrast, the six-month SPY strategies were materially less successful. Almost the entire six-month row underperformed SPY, with relative annualised performance ranging from -5.9% to +0.2%.

For SPY, the favourable historical results were therefore concentrated between one week and three months. The shortest maturities generated the highest backtested returns, while the one-month to three-month range may represent a more realistic compromise between historical performance and ease of implementation.

Are Dividend Aristocrats suitable covered call underlyings?

The NOBL results reveal a different pattern.

Unlike SPY, NOBL produced positive relative performance across almost the entire parameter grid, including several longer-dated strategies requiring substantially fewer option cycles.

Monthly NOBL strategies

The strongest monthly region was found between 3% and 10% out of the money:

The strongest individual monthly cells included:

Based on NOBL’s annualised passive return of 9.1%, these strategies generated gross annualised returns ranging from 12.5% to 13.2%.

The strongest monthly configuration, consisting of one-month calls with strikes 6% out of the money, generated an annualised return of 13.2%.

Over the period examined, this NOBL covered call configuration came close to matching SPY’s passive return. This does not mean that the two strategies carried equivalent risks, exposures or return profiles. It does, however, illustrate the extent to which option income reduced the historical return gap between the two underlying ETFs.

Longer-dated NOBL strategies

NOBL’s positive results were not confined to monthly calls. Several three-month and six-month configurations also outperformed the underlying ETF:

One particularly notable result was the six-month strategy with calls written 3% out of the money:

• annualised performance relative to NOBL: +3.8%;
• monthly Sortino ratio: 1.60;
• gross annualised return: 12.9%.

The comparison was therefore as follows:

This strategy generated an annualised return only 0.5 percentage points below that of SPY, while requiring only two scheduled option cycles per year.

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

SPY and NOBL behaved differently as covered call underlyings

The analysis indicates materially different historical patterns for SPY and NOBL.

SPY generated some of the strongest results within the entire study, but these were concentrated in short-dated options. Performance became less consistent as maturity increased, and the six-month strategies generally underperformed a passive investment in SPY.

NOBL displayed greater consistency across the parameter grid. Its monthly strategies performed well, but favourable results were also observed in the three-month and six-month regions.

This distinction has practical significance. The highest backtested return is not necessarily the most suitable strategy for an investor.

A weekly strategy involves approximately 52 option cycles per year, whereas a six-month strategy involves only two. Fewer rolls ordinarily mean:

• less time devoted to managing the position;
• fewer commissions and bid-ask crossings;
• reduced sensitivity to precise execution;
• fewer opportunities for small implementation differences to compound.

The fact that NOBL produced positive relative results across several neighbouring strike levels and multiple maturities is therefore potentially more informative than the performance of a single isolated cell.

It may indicate greater historical robustness within the tested parameter range. It does not, however, guarantee robustness outside the period examined or under different volatility and market conditions.

Interpretation of the findings

The analysis supports two distinct observations.

First, investors seeking cash income comparable to the dividend yield of a Dividend Aristocrats ETF may not necessarily need to replace SPY with a dividend-focused underlying.

Over the period examined, selected SPY covered call strategies generated gross option premiums within the same general range as NOBL’s dividend yield. Several configurations between one and three months also outperformed SPY on a total-return basis after accounting for the upside surrendered through the calls.

Second, Dividend Aristocrats may themselves provide an effective underlying for systematic covered call strategies.

NOBL’s strongest monthly configurations generated gross annualised returns between 12.5% and 13.2%, compared with 9.1% for a passive investment in NOBL. Its less frequently managed six-month strategies generated between 11.8% and 12.9%.

Historically, the strongest six-month NOBL configuration therefore captured most of the return achieved by SPY while requiring substantially fewer option cycles than a weekly or monthly strategy.

Conclusion

The results do not establish that SPY covered calls can replace Dividend Aristocrats in every portfolio.

The two approaches differ in their sources of income, risk exposures, tax treatment, operational requirements and sensitivity to market conditions. Dividend income arises from distributions made by the underlying companies, whereas covered call income is obtained in exchange for surrendering part of the portfolio’s potential appreciation.

Nevertheless, the analysis provides several relevant insights:

• selected SPY covered calls historically generated option income comparable to NOBL’s dividend yield without requiring a change in the underlying investment;
• SPY’s strongest results were concentrated in shorter maturities, where implementation costs and execution quality are most consequential;
• NOBL produced more consistent results across the tested maturities and strike levels;
• NOBL’s three-month and six-month strategies may have offered a more practical balance between cash income, total return and ease of management;
• over the period examined, covered calls reduced a substantial part of the historical performance gap between NOBL and SPY.

These conclusions remain specific to the selected period, data and implementation assumptions. Their persistence will depend materially on future equity returns, realised and implied volatility, option pricing, transaction costs, taxation and the parameters chosen.

Accordingly, the analysis should be understood as an examination of historical strategy behaviour rather than as evidence of structural superiority or 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.