For investors seeking a good source of passive income, high-yield dividend ETFs like the JPMorgan Nasdaq Equity Premium Income ETF (JEPQ) can be very tempting. A JEPQ dividend generally provides a much higher yield than the average dividend stock and, as an added bonus, pays out each month rather than quarterly. But many income investors have questions about this investment approach. Is the high JEPQ dividend sustainable? What are the risks involved? This in-depth guide will take a look at JEPQ to help you decide if it deserves a spot in your portfolio.
Many investors seek to find a good mix of growth stock potential and dividend income. But it can be a challenge to find that right combination. That’s what makes JEPQ, with its tech-heavy portfolio and 9% dividend yield so appealing to some. But is this a magic bullet? Let’s explore some of JEPQ’s characteristics to help investors determine if it is a good fit for their goals.
Table of Contents:
- What is JEPQ?
- Benefits of JEPQ
- Risks of JEPQ
- JEPQ Dividend: What History Shows
- Investing in JEPQ: Considerations and Alternatives
- Conclusion
What is JEPQ?
The JPMorgan Nasdaq Equity Premium Income ETF (JEPQ) is an exchange-traded fund (ETF) that invests in large-cap Nasdaq stocks and uses covered call options. This approach seeks to provide investors with a steady stream of monthly income along with capital appreciation.
Understanding Covered Call Options
JEPQ seeks to generate additional income by selling covered call options on a portion of the securities in its portfolio. But what exactly are covered call options? And what role do they play in an ETF like JEPQ?
A call option is a contract that gives the buyer the right to buy 100 shares of an underlying stock at a specified price, known as the strike price, before a specified expiration date. This buyer of a call option hopes the underlying stock will rise above the strike price before the option expires. If this happens, they can buy 100 shares at the lower strike price, immediately sell those shares in the market, and pocket the difference.
Meanwhile, the seller (or writer) of the option hopes the stock stays below the strike price so the call option will expire worthless, and they can keep the premium they received for selling the option. JEPQ writes covered call options, which means it owns all the underlying shares, so it’s “covered” should the option buyers choose to exercise their right to buy the stock.
Benefits and Risks of JEPQ
There are both potential benefits and risks to the covered call strategy employed by JEPQ. As with any investment, it is important to consider both the advantages and disadvantages. Here are some of the things that make JEPQ an interesting, albeit risky, choice.
Benefits of JEPQ
High Dividend Yield
One obvious benefit of JEPQ is its large dividend. This makes JEPQ popular for income-seeking investors. But is it too good to be true? High yields are tempting, but it is wise to be cautious and do further research on ETFs before jumping in.
Exposure to Growth Stocks
Another benefit is that it offers exposure to top growth stocks. Tech stocks on the Nasdaq generally offer greater growth potential than dividend stocks.
Monthly Income Distributions
JEPQ is structured to distribute its income monthly rather than quarterly, making it suitable for investors seeking to supplement their passive income or for retirees who desire more frequent income. However, dividends can change and a consistent JEPQ dividend is never guaranteed.
Risks of JEPQ
As enticing as JEPQ might appear to be with its above-average monthly distributions, there are several important risk factors to consider when determining if JEPQ is a wise choice. Here are a few.
Covered Call Risk
Because of JEPQ’s use of covered call options, investors may not fully participate in upward price moves of its underlying holdings. If a stock in its portfolio jumps sharply, its growth will be capped by the covered calls. This can be a source of frustration for investors in a bull market, though in flat or down markets, JEPQ’s option writing strategy is designed to add additional income and outperformance.
Market Volatility Risk
While JEPQ is not entirely dependent on dividends from its holdings to maintain distributions, in the long run, the price of its holdings plays an important part. JEPQ is susceptible to market risk and could decline in value if the overall market goes down.
Concentration Risk
As its name implies, JEPQ is concentrated in a limited number of mostly large-cap Nasdaq stocks, making it less diversified than other, broader ETFs. The majority of these holdings are in the information technology sector, specifically focused on fast-growing mega-cap companies, leaving JEPQ even more vulnerable in down tech markets. Because the JEPQ dividend comes both from dividends and covered call options written against this portfolio, a protracted slump in the tech sector could lead to a significant decline in income payouts.
Expense Ratio
Another risk factor that isn’t exclusive to JEPQ, but which investors need to be mindful of is its expense ratio. Currently at .35%, this annual cost might not seem excessive at first, but over long periods of time, high fees can erode returns, and .35% is not cheap. By way of comparison, index tracking ETFs that focus solely on a particular index, have significantly lower expense ratios. Many, such as those focused on the Nasdaq-100 index, cost a mere .09%.
JEPQ Dividend: What History Shows
JEPQ only started paying a dividend in 2022 so it’s still early in the life of the ETF. While its short history shows a hefty dividend yield of 9.5% at the time of this writing, you can explore the complete J.P. Morgan Exchange-Traded Fund Trust — JPMorgan Nasdaq Equity Premium Income ETF dividend history by creating a free account at Dividendmax. There, you can discover other insights, including dividend stock predictions, a yield chart, the next ex-div date countdown, and more.
Looking back over the dividend history of a stock or an ETF can help predict the potential of future dividends. Although the record for JEPQ is short, its track record is not entirely dependable. Even after examining an ETF’s history it’s impossible to guarantee it will continue to maintain those payouts going forward.
Investing in JEPQ: Considerations and Alternatives
Like many things in life and in the financial world, a diversified investment approach can help investors better navigate the often unpredictable fluctuations in the markets. While the high monthly JEPQ dividend may appeal to some, a safer, longer-term strategy for most new investors may be to opt for a broader approach by seeking high-quality dividend stocks from various sectors of the market.
And because some growth stocks pay dividends, a balanced portfolio containing some dividend ETFs, growth, and dividend-paying companies, could provide solid growth, regular income, and greater diversification than a highly concentrated fund like JEPQ.
Conclusion
Although tempting, high monthly distributions, such as the JEPQ dividend, require thorough due diligence. Many newer investors seeking higher monthly income would be well advised to instead seek high-quality companies from multiple sectors to include in their income-producing portfolio.
Investors considering JEPQ would be wise to familiarize themselves with the specific characteristics and associated risks. It is important to be able to ride out short-term ups and downs in any market. By constructing a diversified investment plan with a variety of dividend-paying stocks from multiple sectors, investors are more likely to experience long-term gains.
