Building a solid investment portfolio often involves combining different assets that complement each other. This can be tricky for new investors. Today, we’ll explore pairing JEPQ and SCHD, two exchange-traded funds (ETFs) with distinct characteristics. We’ll determine if this pairing suits your investment goals.
Table of Contents:
- Understanding JEPQ and SCHD
- Why Pair JEPQ and SCHD? The Benefits
- Potential Downsides to Pair JEPQ and SCHD
- Constructing Your JEPQ and SCHD Portfolio
- Alternatives and Considerations
- FAQs about pair JEPQ and SCHD
- Conclusion
Understanding JEPQ and SCHD
Before pairing JEPQ and SCHD, let’s understand each. JEPQ, the JPMorgan Nasdaq Equity Premium Income ETF, generates income from the Nasdaq 100 index through a covered call strategy. This boosts income, resulting in a high dividend yield for income-seeking investors.
However, this income is often taxed at a higher rate. SCHD, the Schwab US Dividend Equity ETF, emphasizes long-term dividend growth and stability.
JEPQ: High Yield, Tax Implications
JEPQ aims for a high yield. There’s a trade-off. The dividend income is often non-qualified, taxed at your regular income tax rate.
This can lower overall returns. Tax efficiency is a key consideration. Because JEPQ focuses on tech-heavy Nasdaq 100 companies, it’s vulnerable to tech sector fluctuations.
SCHD: Stability and Dividend Growth
SCHD prioritizes stable dividend payers. SCHD’s criteria include consistent dividend history, dividend growth, free cash flow, and return on equity.
SCHD’s dividends are often “qualified,” potentially lowering tax rates. SCHD is considered a dividend equity ETF and income ETF for investors seeking more than just price appreciation.
Why Pair JEPQ and SCHD? The Benefits
Pairing JEPQ and SCHD offers possibilities. It blends a high-yield, tech-focused approach with steady, high-quality dividends. Let’s examine their historical performance in bear markets.
Risk Mitigation and Diversification
Pairing JEPQ and SCHD can offset market risks, shown by their moderate 0.59 correlation (PortfoliosLab). SCHD offers stability with diverse dividend-paying companies.
JEPQ adds growth potential and tech exposure. This balance is crucial for portfolio diversification and risk mitigation. Investors use both ETFs as part of a strategy to achieve specific total returns within their portfolio of dividend ETFs.
Balancing Growth and Income
JEPQ leans towards Nasdaq 100 growth, offering potentially higher returns. SCHD aims for modest gains through dividend payments.
Blending these approaches balances growth and income. It diversifies investment strategies across the spectrum for equity premium income.
Potential Downsides to Pair JEPQ and SCHD
Consider potential drawbacks before investing. Knowing them informs decisions. Here are a couple important points worth noting.
Tax Implications of JEPQ
JEPQ’s dividends are often non-qualified, taxed at your regular income rate. This can significantly impact net returns depending on your tax bracket and holding strategy. Be sure to calculate total returns after taxation.
JEPQ’s Expense Ratio and Active Management
Be mindful of actively managed ETFs’ expenses. They influence long-term goals. JEPQ’s 0.35% expense ratio (source) can subtract from returns.
Especially if it’s a large portfolio percentage. Factor this cost into your personal investment strategy.
Constructing Your JEPQ and SCHD Portfolio
If you choose this pairing, plan your portfolio. A thoughtful strategy is vital, guided by personal preferences. This includes factoring in tax implications of dividend payouts from JEPQ and tax-advantaged accounts.
Asset Allocation Strategies
Consider your risk tolerance when allocating assets. Do you prioritize current monthly income with low tolerance for swings? A higher SCHD percentage with a smaller JEPQ allocation balances investing styles.
This may offer lower downside risk during volatility. It blends the higher current dividend of JEPQ with SCHD’s focus on equity premium income.
Balancing Risk and Return with Diversification
A 50/50 split is common, but a “more stable” approach might suit income-oriented goals. Allocate 70-80% to SCHD and 20-30% to JEPQ. Both hold tech, potentially overexposing the sector.
This reduces reliance on JEPQ’s non-qualified income, which can be heavily taxed. A larger allocation to SCHD may align better with equity premium income and dividend growth investing goals.
Alternatives and Considerations
While JEPQ and SCHD are viable, explore alternatives for income portfolios. This broadens evaluation and diversification.
Tax-Efficient Income Alternatives
Actively-managed ETFs like CGDV, the Capital Group Dividend ETF, offer tax-efficient growth. CGDV’s growth surpasses JEPQ, attracting considerable interest among dividend etfs. SCHD and CGDV might also provide premium income potential.
SCHD and International Investors
Withholding taxes affect liabilities. Explore global markets for income needs. This may increase net gains through tax efficiency if building a strong income portfolio is a goal. Look at different dividend etfs and international dividend stocks to generate income.
FAQs about pair JEPQ and SCHD
What to pair with JEPQ?
SCHD is stable, but consider other dividend and growth ETFs. JEPI and CGDV offer diversification or higher yield. Combining JEPQ with a bond ETF could add fixed income and buffer volatility.
Research fund overlaps to ensure true diversification within equity and income etfs. This helps investors build their income stream strategically across different investments.
Is there a mutual fund similar to SCHD?
SCHB, a large-cap growth stock market fund, is a close alternative. It avoids overlaps with value-focused funds. Other dividend mutual funds could provide additional avenues for premium income while complimenting a position in SCHD.
Is JEPI or JEPQ better?
JEPI and JEPQ are both good dividend options. JEPI focuses on low volatility and high yield, aiming for consistent income generation. JEPQ targets NASDAQ 100 growth and monthly payments.
The choice depends on whether current monthly yield or overall dividend income is your focus. The premium income characteristics may differ, so evaluate their fit for income portfolios.
Is SCHD good for dividends?
Yes, SCHD excels among dividend ETFs. Its low cost, higher average yield (3.64%), and focus on consistent dividends make it suitable for beginners. Many income etfs also use dividend growth as part of their fund aims.
Conclusion
Should you pair JEPQ and SCHD? It depends. JEPQ offers strong income with a tech focus. It also carries market cap risk and potential tax implications from non-qualified dividends. Combining JEPQ and SCHD may give investors a good option to help boost equity premium while diversifying.
SCHD adds stability and tax efficiency, but with lower income. Consider risk tolerance, income needs, tax rate, and long-term goals when deciding. Choosing JEPQ and SCHD or alternatives involves weighing potential returns, volatility, and dividend income suitability for your specific goals within equity etfs. Ultimately, investors who choose to pair JEPQ and SCHD do so for the stability and growth respectively, not just the dividend paid. For other types of premium income, look beyond equity and into things like preferred stock and REITs.
Author Disclosure: The author holds SCHD and JEPQ.
