I have an affinity with collecting passive income. I would like dividend and interest payments to be deposited into my account. I currently reinvest that money into generating more income so I can ultimately achieve my goal of generating enough passive income to cover my recurring expenses.
One of my favorite income generating vehicles is the JPMorgan Equity Premium Income ETF (NYSEMKT: JEPI). The exchange traded fund (ETF) pays a large monthly payment (the last payment was a return of almost 7%). That’s one of the many reasons I continue to grow my position in the passive income machine.
A strategy for premium income
The goal of JPMorgan Equity Premium Income ETF is simple but ambitious. It aims to achieve a distributable monthly income and stock market exposure with less inconstancy Then the S&P500. To achieve that goal, it uses a two-pronged strategy.
The upside potential in the stock market comes from maintaining a defensive portfolio of high-quality stocks. The ETF managers use a bottom top research process to select stocks based on their own risk-adjusted rankings. The ETF holds approximately 100 stocks, guided by:
The managers take a more equal approach. On the one hand, this helps dampen the potential negative impact of underperformance among the top positions. For example, underweight Boeing versus the S&P 500 (0% weighting in the fund) contributed to results during the first quarter, when the aerospace giant underperformed. Meanwhile, there is a larger weighting towards Progressive added to the return in the period.
This stock portfolio offers stock-like returns (and some dividend income) with less risk than the S&P 500, given its targeted but balanced exposure to the highest quality companies in that index.
The other aspect of the strategy is writing out-of-the-money call options on the S&P 500. This strategy generates option premium income that the fund can distribute to investors every month. The premium income it generates is higher during periods of volatility, which helps smooth out returns.
A tempting income stream (and more)
The ETF has certainly provided a premium income offering to fund investors. The latest monthly distribution payment brought the income yield to around 7%, while the rolling twelve-month yield is approaching 8%. The latest payment offered almost as much income as investors can earn from high-yield bonds junk bonds (7.7%). In the meantime, it yields much more income than investors could earn from REITs (4.3% average yield) and the S&P 500 (1.3% dividend yield).
Although bonds provide a steady income stream, this ETF’s monthly distribution can vary significantly:
The payout is typically higher after periods of market volatility because option premiums increase.
In addition to providing an income stream that rivals junk bonds, this ETF offers something bonds can’t match: upside equity exposure. The fund’s portfolio of high-quality stocks tends to increase in value over the long term. Add that price increase to the ETF’s monthly income distributions, and the total refund has returned an average of 12.5% ​​per year since the fund’s inception in 2020. That’s a strong return from an income-oriented investment.
The fund is unlikely to outperform the S&P 500 during strong markets (the S&P 500’s total annualized return is 18.2% since the ETF’s inception in mid-2020). However, its value won’t fall as much as the broader market during corrections because of its more defensive portfolio and ability to cash in on volatility by selling call options on the S&P 500. That makes it possible to offer some upside potential for stocks with less downside risks. risk compared to the S&P 500.
A convincing combination
The JPMorgan Equity Premium Income ETF is becoming one of my favorite instruments for generating passive income. The fund pays a lucrative monthly income stream. It also offers upside potential for stocks with less downside risk. That combination of income and benefit makes it a great suitable for my portfolio as it should grow my income and wealth in the coming years.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Matt DiLallo has positions in Amazon, JPMorgan Equity Premium Income ETF and Meta Platforms. The Motley Fool holds positions in and recommends Amazon, Meta Platforms, and Microsoft. The Motley Fool recommends Progressive and recommends the following options: long January 2026 $395 calls at Microsoft and short January 2026 $405 calls at Microsoft. The Motley Fool has a disclosure policy.
Why I Can’t Get Enough of This Ultra-High-Yield Dividend S&P 500 ETF Originally published by The Motley Fool
