$250,000 in These 3 High-Income ETFs Could Pay You ~$2,800 a Month

One surprisingly important consideration when building a retirement income portfolio is distribution cadence. Traditional stocks commonly pay dividends quarterly. Most bond ETFs distribute monthly. Some of the newest income ETFs have even moved to weekly payouts.

Of course, none of this is economically necessary. A retiree who owns a diversified portfolio can simply sell shares whenever cash is needed. But mental accounting is powerful, and plenty of investors would rather spend dividends and distributions deposited into their account than manufacture their own income by periodically realizing capital gains

For those investors, the growing universe of options-income ETFs provides another possibility. NEOS Investments offers three funds covering large-cap U.S. stocks, the Nasdaq-100, and small-cap stocks, all of which currently make substantial monthly distributions. Splitting $250,000 equally among these three ETFs would produce substantial income

There’s an important qualification, however. I’d view this $250,000 as only the higher-risk income bucket within a much larger retirement portfolio. All three ETFs remain 100% equity strategies with options overlays. They can experience substantial drawdowns, their distributions aren’t guaranteed, and concentrating an entire retirement portfolio in them would introduce considerable risk.

For someone with $1 million, for example, the other $750,000 could be allocated toward considerably more conservative assets such as federally tax-exempt municipal bonds and U.S. Treasuries, whose interest is generally exempt from state and local income taxes. That provides a more stable counterweight while the $250,000 options allocation shoulders the risk.

The Passive Income Math

For this hypothetical portfolio, $250,000 portfolio divided three ways works out to approximately $83,333 invested in each ETF. Using each fund’s most recent August distribution annualized against its current NAV at the time of writing, here’s what the income looks like.

1. The NEOS S&P 500 High Income ETF (SPYI) currently has a 12.04% distribution rate. An $83,333 allocation would therefore generate approximately $10,033 annually, equivalent to about $836 per month.
2. The NEOS Nasdaq-100 High Income ETF (QQQI) currently has a 14.04% distribution rate. The same $83,333 investment would produce approximately $11,700 annually, or $975 per month.
3. Finally, the NEOS Russell 2000 High Income ETF (IWMI) currently has a 14.38% distribution rate. An $83,333 investment would generate approximately $11,983 annually, or about $999 per month.

Add everything together and the hypothetical $250,000 portfolio produces approximately $33,717 annually, or $2,810 per month on average. That’s substantially more than the $25,000 annual, or $2,083 monthly, target. It also provides some diversification across large-cap core, growth-heavy tech stocks, and small-caps companies.

But don’t mistake distribution yield for guaranteed income. These rates annualize the latest distributions and can change significantly. The ETFs can also lose money even while making distributions. For a retiree, total return and preservation of capital remain just as important as the amount deposited each month.

What About Taxes?

There’s another reason these three ETFs can be interesting for a taxable brokerage account: much of their recent distributions has been estimated as return of capital (ROC). Return of capital generally isn’t immediately taxable. Instead, it reduces your adjusted cost basis (ACB), deferring the potential tax liability until you eventually sell the investment. Once your basis reaches zero, additional ROC distributions are generally treated as capital gains.

According to the funds’ August Section 19a-1 notices, the estimated ROC portions of their latest distributions were:

• SPYI: 97%
• QQQI: 100%
• IWMI: 100%

Those numbers look extremely tax-efficient, but there’s an important caveat. Section 19a-1 notices provide preliminary estimates. They don’t determine the final federal tax characterization of the distributions. Investors won’t know that until the funds complete their year-end accounting and issue Form 1099-DIV.

Investors also need to monitor their adjusted cost basis carefully. Tax deferral is valuable, but ROC isn’t inherently good or bad. If an ETF continually pays distributions while its NAV deteriorates, investors could simply be receiving their own capital back. So far, these strategies have sought to generate constructive ROC through their options and tax-management techniques, but NAV and total return should always be evaluated alongside the headline distribution rate.

Contact [email protected] for any questions or corrections.