1 ETF That Will Cut You a Monthly Check

As interest rates have risen and stock valuations moved to historic highs, investors have been taking a closer look at income-generating investments. Dividends are generally a good hedge against market volatility and provide a steady stream of income that acts as a cushion against share price downturns.

One of the more interesting income opportunities in the market today is JPMorgan’s Equity Premium Income ETF (JEPI), an actively managed fund that offers a 30-day SEC yield of 6.83%.

While the percentage yield is important to many investors the frequency with which it pays often takes precedence. So how often does JEPI pay dividends? JEPI pays shareholders a monthly dividend that equates to approximately 0.56% of assets invested.

Before deciding whether it’s a good fit for your portfolio, there are a few other key items to note.

What Are JEPI’s Holdings?

JEPI comprises 128 stocks with a heavy focus on technology and financial companies.

Some of the fund’s top holdings include familiar names like Microsoft, Amazon, Alphabet, MasterCard and Visa.

It’s a well diversified fund with no holding accounting for more than about 1.7% of the total.

So How Does JEPI Generate Monthly Dividends?

Given that most stocks pay quarterly dividends, JEPI addresses the challenge faced by investors who have monthly costs to serve but only get paid quarterly dividends. 

But you might be wondering how is the fund able to pay a monthly distribution when the vast majority of stocks pay quarterly dividends.

The answer can be found in the fund’s options trading activity. Fund managers buy stocks in companies believed to offer good value and limited potential for volatility.

They then sell options on the shares held in order to create a regular flow of secondary income that is distributed to the shareholders on a monthly basis.

JEPI Vs Alternatives

A few other monthly dividend producers exist, though they tend to be rare. Comparing JEPI against them, investors can get a sense of the value proposition offered by JP Morgan’s monthly dividend fund.

The first and most obvious of these is Realty Income, a REIT that pays dividends on a similar schedule and in fact has trademarked the term The Monthly Dividend Company.

This REIT delivers a 5.6% yield, a good deal below what JEPI produces. It’s worth noting, though, that Realty Income has consistently raised its dividend for 32 consecutive years. JEPI, by contrast, was started only three years ago.

Another popular monthly dividend REIT is LTC Properties. This REIT offers yields closer to those of JEPI at 6.6%. While LTC Properties lacks Realty Income’s dividend growth, its monthly dividend has been a highly predictable $0.19 per share since 2016.

All in all, JEPI outshines the vast majority of other monthly income stocks and funds in terms of yield. It’s worth noting, though, that there is a notable risk difference between a REIT and an options-based income fund.

While REITs are subject to market volatility, they are secured by real estate that typically retain value even during market downturns.

JEPI may be more susceptible to market downturns because the underlying shareholdings are more susceptible to the whims of Mr Market versus real estate that tends to move by smaller percentage swings.

Does JEPI Still Deliver Growth?

Income is all well and good, but it’s also helpful for an ETF to still deliver some level of price appreciation for investors. Somewhat surprisingly given its high yield, JEPI performs fairly well on this front as well.

In the three years the fund has been operating, the average annual price return has been 7.2%. Though this is below the return one might expect from buying the S&P 500, JEPI’s high yield largely makes up for the somewhat lower price returns.

In a sense, JEPI offers the best of both worlds, meaning the potential for share price appreciation in addition to the cushion from a steady income stream of dividends.

What’s The Catch?

On the surface, JEPI looks like an excellent investment that delivers a combination of excellent income and decent growth. However, a noteworthy drawback exists associated with the options trading activity the fund engages in.

Options trading can produce elevated returns, but it can also create large losses when markets move unexpectedly. As such, most options trading ETFs have failed to beat the broader market over the long run.

When calls are sold on positions, the upside is capped so if one of JEPI’s holdings runs up one month above the call strike prices, the share price upside may be missed even if the call premium is captured. If the share price gains are larger than the call premium sold, JEPI shareholders miss out on the difference.

JEPI also suffers from the drawback of having a relatively short track record. The fund has only been in existence for three years.

With that said during that time it has been quite successful. However, it hasn’t stood the test of time in the way comparable monthly dividend producers like top REITs have.

Who Is JEPI Right For?

Due to the historical inability of options funds to beat the market at large, JEPI probably isn’t the best choice for young investors with long time horizons.

Older investors seeking monthly income, though, may find significant value in adding JEPI to their portfolios. Even with the limitations associated with selling calls, there is a decent argument to be made for this ETF when it comes to generating a large flow of income.

To buy JEPI, investors should also have at least a decent tolerance for risk. Unlike dividend stocks, the payouts a fund like JEPI makes can move up and down. As such, the distributions are likely to be a bit less predictable, even if they are higher than what investors are likely to find in stocks, REITs and even most high-yield bonds.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.