Exchange-traded funds (ETFs) make it easy to start generating passive income. Several funds invest in income-generating assets or use strategies designed to produce income. Some of those investments can deliver very lucrative income for fund investors.
The Global X SuperDividend ETF (SDIV 0.46%) and the JPMorgan Equity Premium Income ETF (JEPI 0.47%) stand out for their high-income yields. Here's a closer look at the two dividend ETFs, which will help investors decide which is better for them to buy for passive income.
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Collecting income from 100 of the highest-yielding dividend stocks
The Global X SuperDividend ETF has a very simple strategy. The fund invests in 100 of the highest dividend-yielding securities in the world. Its global strategy opens the door for more high-yielding investment opportunities while helping reduce some risk by increasing the fund's diversification.
The ETF distributes dividend income to its investors each month. That income has really added up over the past year as the fund has paid an eye-popping 11.7% yield. At that rate, every $1,000 invested in this ETF would produce about $117 of dividend income each year.
However, the fund's distribution payments fluctuate based on the dividends paid by its holdings. Many of its holdings pay variable dividends because of the volatility of their cash flows. Furthermore, many higher-yielding dividend stocks have trouble maintaining their dividend payments due to financial challenges. Because of that, the fund's payments have trended down throughout its 13-year history:
SDIV Dividend data by YCharts.
Another potential pitfall is that stocks with higher dividend yields don't tend to offer much in the way of price appreciation since the dividend payment typically makes up the bulk of its return. Because of that, the fund has delivered an average annual return of negative 1% since its inception. That lackluster return is because the high-yielding dividends paid by the fund haven't been able to offset the loss in value of the underlying dividend-paying stocks. However, the fund has performed much better in recent years, delivering an 8.2% return over the past year and a 4.5% annualized return over the last five.
Cashing in on options
The JPMorgan Equity Premium Income ETF has a dual objective. The ETF aims to generate income it can distribute to investors each month and provide equity market exposure with less volatility. It does that through a two-pronged investment strategy:
- Disciplined options overlay strategy: The fund's managers write out-of-the-money (i.e., above the current market price) call options on the S&P 500 index. By selling or shorting options, the fund collects the option premium (value of the option) as income. It distributes the income produced by this strategy each month.
- Defensive equity portfolio: The ETF also holds a portfolio of stocks selected by the fund's managers based on fundamental research and its proprietary risk-adjusted stock rankings.
The ETF's options-writing strategy can be very lucrative. It has a 7.4% yield based on income distributions paid out over the past 12 months. However, the options income it generates can vary from month to month:
JEPI Dividend data by YCharts.
In addition to income, the fund strives to provide investors with less volatile exposure to the upside of stocks in the S&P 500. This strategy has enabled it to produce an attractive total return when combining the options income with a rising value in the ETF's price. Since its inception in May 2020, the fund has produced an average annual total return of 11.4%.
A better ETF for your money
While the Global X SuperDividend ETF provides investors with a higher current income yield, the JPMorgan Equity Premium ETF has a higher total return potential. Because of that, it's a better ETF to buy for passive income. It should supply investors with lucrative distributions each month, while the value of the fund should also rise, helping investors preserve and grow their wealth while they collect income.
