Conventional investors in the capital markets usually either pursue capital appreciation through equities or income through bonds or fixed income securities. The fastest growth oriented stocks are in companies that reinvest revenues for further growth. On the other hand, bonds, preferred stocks, or REITs and similar securities are focused on generating and paying out regular dividends to their bondholders or shareholders.
Of course, the ideal scenario is one where an investor can have their cake and eat it too – growth along with income. There are a few stocks that fit that bill, such as Verizon, but managing such a portfolio’s volatility can be a full time occupation. The other obstacle is to be able to build a sizable enough principal base from which a cumulative dividend yield commensurate with a monthly income that could supplement, or replace a monthly income if needed. Any kind of yield from investments over 5%-6% is normally not still on a fast growth track, so a strategy deploying some kind of compromise or combination system would be needed. Also, the patience to build up the principal base to pull off this goal is crucial, as it entails working two opposing methodologies concurrently.
High Yield + Growth: Pipe Dream of Reachable Target?
A 25-year old Reddit poster has a goal of investing $30 per day into a high dividend ETF with the goal of being able to obtain a monthly $3,000 – $4,000 per month in passive dividend income by age 40. He was seeking advice regarding opinions on his game plan, which included the following:
- His plan was to invest $30 per day and $815 per month for the next 15 years.
- His ETF of choice is the JP Morgan Nasdaq Equity Premium Income ETF (NASDAQ: JEPQ).
- Based purely on math at the time when he commenced in 2023, his calculations forecasted that by 2038, the portfolio would grow at an annual 6% rate to $510,596 and would be generating $4,152.85 per month.
The poster asked if the predictions were realistic, or they were a pipe dream.
Breaking Down The Details
A closer look at the poster’s investing model mathematically works conceptually, but certain real world challenges could derail it. On the positive side:
- JEPQ is an ETF that tracks the NASDAQ 100 Index. As many high growth tech stocks are listed on NASDAQ, they aren’t particularly known for containing high yield dividends. However, it engages in a covered call option writing component with a long option buying strategy, which is why it is averaging an annual 11.28% divided yield.
- By investing both an incremental daily amount in addition to a larger monthly amount, the poster will get the benefit of compounding.
- The poster also admitted to having separate investments in growth ETFs , but wanted to grow an investment fund purely for income, but not real estate based, as well.
On the negative side:
- The poster is predicating his model on an annual 6% growth rate. That level of growth is a historical anomaly, and there is no guarantee that that rate of growth is sustainable for 15 months, let alone for 15 years.
- The poster’s accounting for taxes might be underestimated, so his actual net income may be lower than projected.
- JEPQ only has an inception date of 5-3-2022. Its trading range for its entire history has stayed between $40 and $60 per share. Should grow to the point where it breaks technical resistance to start trading at new highs, continuing to invest while averaging up will erode his 11.28% average yield, as the newer purchases will lock in lower yield as the ETF price rises.
A Win-Win Situation
Among the advice tips and suggestions that were posted in response on Reddit, two related strategies were of particular interest and applicable to augment and secure the poster’s game plan.
- One responder advised amassing a large position in JEPQ and to use the dividends to fund purchases of growth ETFs, like VOO or others. He was able to retire at age 55 by deploying a mix strategy using his taxable emergency fund account, which now holds growth ETFs. The purchases were funded from dividends that he had been able to get earlier on. He now continues to receive $55,000 annually in passive dividend income. He effectively converted his emergency growth fund into a passive income emergency fund.
- Another responder suggested buying Neos S&P 500 ® High Income ETF (BATS: SPYI) in a taxable account to serve as an emergency fund. SPYI has an 11.91% yield, and utilizes a similar option strategy to generate yield. It tracks the S&P 500. He suggested that once the poster reaches his passive income dividend target, he should consider using buying high growth ETFs, such as the Schwab US Large-Cap Growth ETF (NYSE: SCHG) or Invesco NASDAQ 100 ETF (NASDAQ: QQQM). As both of these ETFs have minimal dividends, they would not add to income taxes, and could serve down the road as an extra reserve fund in case his requirements exceed his passive income.
In conclusion, the poster deserves props for such forward thinking at a young age. By demonstrating smart foresight and proper planning, he will likely achieve his goal and embody the maxim, “where there’s a will, there’s a way.”
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