Generating lucrative monthly passive income from dividend ETFs can be truly life changing:
- The monthly passive income can help keep your mind calm and rational during market volatility since the psychological boost of seeing regular cash flow hit your account from your investments can focus your perspective on the long term rather than the daily gyrations in your portfolio value.
- Living off of passive income from dividends can free you from the need to work to support yourself once your passive income exceeds your living expenses. Moreover, since ETFs are diversified portfolios that are managed for you, they make for truly passive investments.
- Receiving cash flow on a monthly basis can help you better gauge how close you are to achieving financial independence (i.e., your passive income exceeding your expenses) since you can more easily compare it to your monthly expenses.
- High-yield monthly dividend ETFs can dramatically accelerate your retirement timeline since they throw off a lot more passive income than lower-yielding stocks and even some bonds do.
- Retiring on dividends reduces the sequence of return risk since you never have to sell your principal/shares to fund living expenses and can instead just live off the stream of passive income. This can make you agnostic to market volatility, in contrast to those who are dependent on stock market returns in order to support their retirement plans.
With these points in mind, we will look at two popular high-yielding monthly paying dividend ETFs and share three reasons why the Neos S&P 500 High Income ETF (BATS:SPYI) is a better investment opportunity today than JPMorgan Nasdaq Equity Premium Income ETF (JEPQ) is.
#1. Higher and More Consistent Yield
Both funds generate enhanced monthly yield by selling calls or notionally doing so through equity-linked notes to generate cash flow that they then distribute to shareholders. On a trailing 12-month basis, SPYI has significantly outpaced JEPQ in this endeavor, boasting an 11.64% yield compared to JEPQ's 9.06% yield. An over 250 basis point surplus in yield is a very significant difference, especially given that these funds focus on meeting the needs of income investors looking for monthly cash flow.
Moreover, as the chart below makes clear, SPYI's monthly payouts are much more consistent than JEPQ's. This, too, is extremely important for investors who are looking to generate monthly income from these funds to pay for living expenses:
#2. Better Diversification
Another reason to prefer SPYI over JEPQ as an income investor looking to retire with dividends is that SPYI is much better diversified than JEPQ. JEPQ hails as a fund that gives investors access to the big names (and potentially big returns) of the Nasdaq (QQQ) while also giving them a big monthly distribution, thereby giving income investors a bit of the best of both worlds. So far, this approach has worked out thanks to the raging bull market in the tech sector since the fund's inception, with JEPQ outperforming the S&P 500 (SPY) over that period of time. However, the notional covered call strategy employed by the fund has also led to material underperformance relative to QQQ:
What this means is that there's nothing special about JEPQ's strategy and that its outperformance has been driven 100% by the raging bull market in QQQ. If/when the tech sector's incredible hot streak ends, JEPQ will likely materially underperform along with it. This means that JEPQ's total return performance will likely be quite volatile over time, given that the tech sector has also tended to be more volatile over the years.
In contrast, SPYI - while still having significant exposure to mega-cap tech stocks - has much better diversification by sector. This difference is clearly illustrated in SPYI's sector breakdown:
- Technology - 31.55%
- Financials - 12.63%
- Health Care - 12.49%
- Consumer Cyclical - 10.28%
- Communication - 8.99%
- Industrials - 7.85%
- Consumer Defensive - 6.03%
- Energy - 3.84%
- Real Estate - 2.24%
- Utilities - 2.15%
- Basic Material - 1.95%
- Cash & Equivalents - 1.45%
Meanwhile, JEPQ's sector breakdown is heavily overweight technology:
- Technology - 51.36%
- Communication - 15.42%
- Consumer Cyclical 13.46%
- Health Care - 6.90%
- Consumer Defensive - 6.48%
- Industrials - 4.03%
- Utilities - 0.96%
- Financials - 0.66%
- Energy - 0.41%
- Real Estate - 0.33%
Moreover, SPYI's portfolio consists of 510 total holdings, more than five times JEPQ's 99 total holdings.
In addition to leading to more stable total return performance over time, this diversification likely also helps to explain SPYI's more consistent distribution track record relative to JEPQ's.
#3. More Defensive
SPYI's portfolio allocation also makes it more defensive given that it has far greater exposure to financials, utilities, and healthcare stocks with less exposure to the more volatile technology sector. This means that it will likely hold up better in the event of the economy going into recession. At the same time, SPYI still has nearly as much exposure to the mega-cap technology stocks as JEPQ, giving it the strength and stability that comes with investing in those powerful companies.
SPYI's top six holdings consist of six of the "Magnificent Seven" stocks:
- Microsoft Corp (MSFT) - 7.31%
- Apple Inc (AAPL) - 6.06%
- NVIDIA Corp (NVDA) - 5.30%
- Amazon.com Inc (AMZN) - 3.86%
- Alphabet Class A & C (GOOG)(GOOGL) - 3.51%
- Meta Platforms, Inc (META) - 2.66%
These compare with JEPQ's top six holdings quite closely:
- Microsoft Corp - 7.36%
- Apple Inc - 5.78%
- Nvidia Corp - 5.50%
- Amazon.com Inc - 4.59%
- Meta Platforms Inc - 4.46%
- Alphabet Class C - 3.67%
As a result, the big differences between SPYI and JEPQ are not in their exposure to mega-cap tech, but rather their respective exposure to smaller-sized tech stocks as well as SPYI's 1.8% position in Berkshire Hathaway (BRK.A)(BRK.B) compared to JEPQ's lack of exposure to the stock. Overall, this paints a picture where SPYI is more defensively positioned than JEPQ.
Investor Takeaway
Both JEPQ and SPYI offer investors an attractive monthly yield. However, SPYI's yield is higher and more consistent and its portfolio is much better diversified and more defensively positioned. While JEPQ may be an attractive opportunity for income investors who simply want to supplement their high-yielding portfolios with some tech exposure without sacrificing yield in the process, SPYI looks like a much better one-stop solution for income investors than JEPQ.
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