Generating recurring cash flow from your investments can help you save for retirement and also enable you to retire early. But with many dividend stocks to choose from, it can seem overwhelming trying to pick the right investments.
You can, however, simplify the process significantly by investing in an exchange-traded fund (ETF) which provides a high yield. Investing in an ETF can give you exposure to dozens, even hundreds or thousands of stocks, without needing to worry about picking individual stocks. And one of the best income-generating investments to consider for your portfolio today is the JPMorgan Equity Premium Income ETF (JEPI 0.72%).
The ETF yields well over 7%
Undeniably, one of the most attractive features of JEPI is that it offers an incredibly high yield. Its 12-month rolling dividend yield is 7.54%. That’s a much higher return than what you can get if you tried just picking safe stocks; the S&P 500‘s average yield is only 1.2%.
The fund makes distributions every month to its investors, which can also provide you with a much more steady and consistent stream of income than you get with dividend stocks, which usually make payments on a quarterly basis. If you’re looking for greater and more consistent income, JEPI can be an ideal option in that regard. It also charges a modest expense ratio of 0.35%.
JEPI’s focus on high income comes at a cost
JEPI’s strategy involves picking stocks and using derivatives, including call options, to help generate monthly income for investors. And you’ll still get exposure to many top stocks, including Amazon, Nvidia, and Meta Platforms, with the ETF just as you would with other funds. But no stock makes up even 2% of the ETF’s overall weight, meaning these investments won’t have an oversized impact on the fund’s performance. There’s good diversification in the ETF with 132 stocks in total.
While the fund’s strategy allows investors to get some strong, consistent cash flow, it comes with a caveat: The total returns likely won’t be impressive. Other ETFs have greater exposure to and reliance on growth stocks, which can result in better returns. JEPI is a more diverse option, and it can perform better during down trends but produce underwhelming returns when the overall market is doing well.
JEPI launched in May 2020, and the ETF has largely underperformed the S&P 500 since then, and that’s because growth stocks have been doing fairly well.
JEPI Total Return Level data by YCharts.
But in a down year such as 2022 when the S&P 500 fell by 18% (including dividends), JEPI investors experienced a drop of less than 4%. The fund could similarly provide some ballast to investors today who may be concerned about the markets and the potential for a correction in the near future.
Does JEPI belong in your portfolio?
The big question you need to ask yourself when deciding whether to invest in JEPI is whether it fits into your investing strategy. It has underperformed the market, and you could generate better returns by simply targeting growth stocks or trying to mirror the S&P 500.
But if you’re a risk-averse investor or your priority is just collecting income every month, and you’re OK with more modest overall returns, then JEPI can be a solid investment to hang on to and potentially build your portfolio around. While you might miss out on some gains if the market continues to perform well, you could also limit your losses in a downturn by taking on a more conservative and defensive investment with JEPI.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Meta Platforms, and Nvidia. The Motley Fool has a disclosure policy.