The past few years were not kind to high-yield income-seeking investors. The Federal Reserve’s “higher for longer” monetary policies that kept interest rates at historically elevated levels depressed high-yield stocks and exchange-traded funds (ETFs).
The situation may be about to reverse. The Fed seems intent on carrying out a new era of rate-easing policies to keep the economy from a hard landing. It cut its benchmark rate for the first time in four years and appears committed to additional rate cuts for at least the next year. That should make high-yield investments like stocks and ETFs attractive once more. JPMorgan Equity Premium Income ETF (NYSEARCA:JEPI) and Global X SuperDividend U.S. ETF (NYSEARCA:DIV) are two of the best ETFs to buy today.
24/7 Wall St. Insights:
- High-yield investments like stocks and ETFs look less attractive in high-interest rate environments as less risky assets like bonds become more attractive.
- With the Federal Reserve entering a rate-easing cycle, high-yield equities will become more attractive once more.
- Sit back and let dividends do the heavy lifting for a simple, steady path to serious wealth creation over time. Grab a free copy of “2 Legendary High-Yield Dividend Stocks“ now.
JPMorgan Equity Premium Income ETF (JEPI)
The JPMorgan Equity Premium Income ETF offers yields above its component stocks by selling advanced covered call options
The first high-yield dividend ETF to consider is the JPMorgan Equity Premium Income ETF, which owns a basket of top dividend stocks and yields 6.3% annually.
When you look at the over 100 stocks JEPI owns, two things stand out: many of its holdings offer relatively low yields of around 1%, while others, like Amazon (NASDAQ:AMZN | AMZN Price Prediction), don’t even pay a dividend. So how is the ETF able to offer such a lucrative yield when many of its components sport light yields or none at all?
That’s because JEPI buys what are known as equity-linked notes (ELN), which are basically an advanced covered call option. As much as 20% of its portfolio is in ELN’s. They drive income to JEPI through premiums paid by the option buyer, which the ETF then uses to pay its dividends.
The ETF tends to perform better during periods of market volatility, especially when the market is trending lower, which can push its yield higher. In fact, JEPI can often serve as a hedge for such periods.
However, investors should be aware ELN income and covered call income can be taxable, meaning the ETF is best-suited for tax-free or tax-deferred accounts. Particularly if you’re retired or plan to retire soon and are looking for immediate income, JEPI might be a strategic ETF to buy.
Global X SuperDividend U.S. ETF (DIV)
The Global X SuperDividend U.S. ETF focuses on the biggest dividend stocks in the U.S.
The Global X SuperDividend U.S. ETF is a high-yield dividend ETF turned up to 11. The ETF owns 50 of the highest dividend-paying stocks in the U.S. to potentially boost yield, but does so with low volatility.
DIV also pays its dividend monthly, an attractive option for investors looking for steady revenue streams. The three largest holdings in its portfolio are market maker Virtu Financial (NASDAQ:VIRT), gas utility Spire (NYSE:SR), and oil and gas midstream leader Kinder Morgan (NYSE:KMI). In fact, utilities and real estate investment trusts (REITs) comprise nearly 40% of the ETF’s holdings. The tech sector, though, is very underrepresented, which means the fund will likely underperform when tech stocks are soaring.
Although the Global X ETF has lagged behind the S&P 500 over the past five years, when the tech sector tanked in 2022, it handily beat the benchmark by double-digit percentage points. That’s going to be a function of the low-beta stocks the asset managers seek out, but it will protect your downside in down markets. However, that will also potentially limit your upside in bull markets.
Global X SuperDividend U.S. ETF might not be a fit for everyone, but with a yield of 5.9% currently, it just might be one to look at more closely in the current environment.
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