The Best High-Yield Dividend ETF to Purchase Now

If you're looking to invest, consider the popular JPMorgan Nasdaq Equity Premium Income ETF, known for its impressive yield of nearly 10%. This exchange-traded fund (ETF) has gained popularity among income-focused investors.

In recent years, particularly 2022 and 2023, higher interest rates prompted many income investors to shift their focus from dividend stocks to low-risk financial products like CDs, T-bills, and bonds. This transition resulted in dividend-paying stocks and ETFs losing some appeal.

However, the landscape is changing as the Federal Reserve has already implemented three rate cuts in 2024, with expectations of at least two additional cuts in 2025. Such actions could lead to increased interest in higher-yielding dividend stocks and ETFs.

The transition back to dividend stocks is expected to take time. Currently, the yield on the 10-year Treasury is around 4.8%, making many fixed-income options more attractive than most dividend stocks. Hence, instead of rushing to buy individual dividend stocks immediately, a more prudent approach might be to invest in a diversified income-focused ETF that employs covered calls to enhance its yield.

Understanding Covered Call ETFs

A covered call involves an investor selling a call option on stock they own. This strategy allows the investor to earn a premium while offering the buyer the right to purchase the underlying stock at a predetermined price by the expiration date. If the stock price does not exceed the strike price, the investor keeps the premium and the stock. However, if the stock exceeds the strike price, the investor has to sell at that price.

For example, if an investor holds 100 shares of Apple purchased at $100 each, they may choose to sell a covered call with a strike price of $250 while the shares are trading at $230. If Apple's price climbs to $260 before the option expiration, the investor must sell at $250 but retains the premium earned from the option sale.

This strategy can be beneficial in a stagnant market where little price movement occurs. However, it may limit potential profits in a bullish market, as rapidly rising stocks could be called away. Many investors use this method to boost their income.

Because continuously managing covered calls on various positions can be complicated, numerous financial institutions now provide ETFs that automatically conduct covered call trading on diversified stock portfolios, leading to consistently higher yields compared to traditional dividend ETFs.

Why Invest in the JPMorgan Nasdaq Equity Premium Income ETF?

The JPMorgan Nasdaq Equity Premium Income ETF contains 103 stocks that align closely with the Nasdaq-100 index. It writes covered calls on its holdings each month, delivers monthly income distributions, and boasts a 30-day SEC yield of 9.76%. Additionally, its expense ratio is low at 0.35%.

Rather than directly writing covered calls, this ETF utilizes equity-linked notes (ELNs) associated with covered calls, making it more tax-efficient since earnings from trade operations are not taxed as short-term capital gains.

This ETF's connection to the Nasdaq-100 ensures a well-diversified investment strategy, with top holdings including Microsoft, Nvidia, Apple, and Amazon. Currently trading at $55.50, it is slightly below its net asset value (NAV) of $55.95, meaning investors can acquire these stocks at a minor discount.

The high yield associated with this ETF arises from the more significant premiums obtained from selling covered calls on volatile stocks, which tend to fluctuate more than stable ones. The ETF's diversified nature helps mitigate the risks associated with such volatility while focusing on generating regular monthly income rather than solely pursuing the highest-priced covered calls.

These characteristics position the JPMorgan Nasdaq Equity Premium Income ETF as a solid option for those seeking a reliable near-10% yield in a fluctuating market. It may not appeal to growth-focused investors, but for individuals looking to generate additional income while navigating a sideways market, it represents an excellent choice.

ETF, Dividend, Income