What’s better than a dividend paid out every quarter? How about a dividend every month? That’s exactly what the NEOS S&P 500 High Income ETF (BATS:SPYI) has to offer investors, and it also delivers a huge dividend yield.
I’m bullish on this new monthly dividend ETF from NEOS based on its attractive payout schedule and its stunning 11.6% dividend yield, which is a whopping nine times the yield of the S&P 500 (SPX).
What is the strategy of the SPYI ETF?
According to fund sponsor NEOS, SPYI aims to “generate high monthly income from investments in the constituents of the S&P 500 Index and the implementation of a data-driven call option strategy.”
The fund “employs a call options strategy that may involve both sold and purchased SPX index options, which may provide the opportunity to profit from rising equity markets.”
Essentially, SPYI owns the shares of the S&P 500. It then generates monthly income for its holders through both the dividend payments from these shares and by selling call options on the S&P 500 to generate additional income through the premiums of these options contracts.
While this generates a high monthly income, investors should also be aware that by using this strategy they may be sacrificing some level of upside from capital appreciation. If SPYI’s holdings rise above the strike price for the covered call contracts it sells to generate this income, SPYI will miss out on much of this additional upside.
You can see this dynamic by looking at the ETF’s performance. For example, in 2023, SPYI generated a total return (including price appreciation and dividends) of 18.1% for the year. While this was a strong return, it underperformed the S&P 500’s return of 26.3% for the year.
There is one thing that SPYI does a little differently than other ETFs that use this covered call strategy, however. Instead of investing all of the money it receives from selling call contracts, it has the option to reinvest a portion of the proceeds into purchasing cheaper, further out-of-the-money call options, allowing it to participate in some of this upside if the underlying holding moves above the strike price.
As NEOS explains in the fund’s summary prospectus, the fund aims to use the S&P 500 call options “to generate a net credit, meaning that the premium received from the sale of the call options will be greater than the cost of purchasing the long, out-of-the-money SPX call options.”
Incredible dividend
While the strategy is complex and has some pros and cons in terms of capital growth and total return, there’s no denying that it’s a powerful way to generate significant income. This is evident from SPYI’s whopping 11.6% dividend yield, which is about nine times higher than the S&P 500 (currently yielding just 1.3%).
Furthermore, SPYI yields more than twice the 4.35% yield on a 10-year Treasury bond, making it an attractive investment that generates income regardless of the interest rates we find ourselves in.
ETFs that use this strategy have become more popular in recent years, and it’s worth noting that SPYI also has a higher yield than many of these. For example, the JPMorgan Equity Premium Income ETF (NYSEARCA:JEPI), the largest and best-known of these ETFs, has a yield of 7.4% and the JPMorgan Nasdaq Equity Premium ETF (NASDAQ:JEPQ) yields 8.8%. These are both impressive returns, but SPYI’s is considerably higher.
It’s important to note that SPYI’s dividend payout level isn’t set in stone and the amount can vary from month to month. However, payouts have been relatively consistent, ranging from $0.47 to $0.50 per month over the past year. Additionally, SPYI has paid out monthly since its launch in August 2022, so it’s starting to build a strong track record of monthly dividend payments.
SPYI’s Holdings
SPYI offers strong diversification, with 508 holdings. The top 10 holdings make up a reasonable 38% of the fund. Below is a breakdown of SPYI’s top 10 holdings using TipRanks’ holdings tool.
Given the fund’s strategy of investing in the constituents of the S&P 500 index, its top holdings unsurprisingly largely mirror those of the broad market index. The holdings include household names such as Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), Nvidia (NASDAQ: NVDA), Amazon (NASDAQ:AMZN), and Meta-platforms (NASDAQ:META).
Steep cost ratio
One negative aspect of SPYI is that it has a fairly high expense ratio of 0.68%. This means that an investor in the fund will pay $68 on a $10,000 investment over the course of the year. Assuming the fund returns 5% per year in the future and maintains this current expense ratio, this investor will pay $379 in expenses over a five-year time horizon, a fairly steep total.
That said, this is a complex, actively managed ETF, so it’s understandable that it has a higher expense ratio than your typical index fund. As long as the ETF continues to pay large dividends each month, most holders will be comfortable with the above-average expense ratio.
Is it a bargain to buy SPYI stock, according to analysts?
Looking at Wall Street, SPYI earns a Moderate Buy consensus rating based on 403 Buys, 93 Holds, and nine Sell ratings assigned over the past three months. The average SPYI stock price target of $55.24 implies 9.06% upside potential from current levels.
The conclusion: a strong option for income investors
Investors should be aware that investing in call option ETFs like SPYI can limit potential capital appreciation. However, with a remarkable yield of 11.6%, it’s hard not to like this ETF. I’m bullish on SPYI as a great option for income investors based on its attractive monthly payout schedule and huge dividend yield of 11.6%. As part of a balanced portfolio, it’s an effective tool for generating regular, above-average income on a stable basis.
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