{"id":16747,"date":"2023-06-01T11:24:26","date_gmt":"2023-06-01T15:24:26","guid":{"rendered":"https:\/\/ifintechworld.com\/investing\/but-are-these-dividends-safe\/"},"modified":"2023-06-01T11:24:28","modified_gmt":"2023-06-01T15:24:28","slug":"but-are-these-dividends-safe","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=16747","title":{"rendered":"But Are These Dividends Safe?"},"content":{"rendered":"
\n

We were only a minute into our home-from-school commute. But I wasn\u2019t going to last seven more.<\/p>\n

\u201cHey!\u201d I asserted in my dad voice. \u201cIf I hear any more whining about the air conditioning, it\u2019s going off. And we\u2019re rolling down the windows. And\u2026\u201d<\/p>\n

I paused for effect and soaked in the temporary silence.<\/p>\n

\u201cWe\u2019ll drive home like it\u2019s the 1980s.\u201d<\/p>\n

Two small gasps emerged from the back seat. My threat appeared to hit home.<\/p>\n

My kids know from household folklore that car rides in the \u201880s were no joke. Seat belts were present, but not required. Smoking in the driver\u2019s seat was common. And there was limited automotive air conditioning<\/em>.<\/p>\n

The truce lasted for a few seconds. It was broken when a five-year-old hand made a rogue run at the backseat air vent. The limb was unceremoniously slapped away by her rival. Double whining ensued.<\/p>\n

<\/fbs-ad><\/p>\n

Off went the A\/C. Down went all four windows. Dad may not be flawless, but he does not<\/em> make empty threats.<\/p>\n

We spent the rest of the commute with 91-degree air in our faces.<\/p>\n

Hey, it could have been worse. It could have been July. My oldest, resigned to a warm but survivable drive, made conversation.<\/p>\n

\u201cDad, how did windows go down in the \u201880s?\u201d I described the primitive technology we used\u2014a roller<\/em> that required all of the arm strength a young one could muster:<\/p>\n

\u201cNo buttons, hon,\u201d I explained. \u201cYou had to put your entire arm into the thing.\u201d<\/p>\n

But I was not done. Time to lay it on thick. \u201cAnd even then. You hoped<\/em> the window would go down all the way. Often, it got stuck mid-journey.\u201d<\/p>\n

Kids these days<\/em>. Mine will never<\/em> manually roll down their own windows.<\/p>\n

Most luxuries, like automatic windows and mobile A\/C, are better now than they were then, dividend investing included. You and I, as careful contrarians, have big payers at our fingertips that we could only dream about back in the days of optional seat belts.<\/p>\n

It\u2019s exciting. Quite the time to be alive! But we must be careful\u2014even when these fat yields come synthetically packed in the form of neat tickers from JPMorgan (JPM)<\/strong>:<\/p>\n

No my contrarian friend, we did not<\/em> have funds like these back in the \u201880s. Heck, if we saw a yield of 9.4% or, heaven forbid, 12.5%, we\u2019d have assumed the worst!<\/p>\n

Fast forward to the 2020s, when Jamie Dimon and his team launched these ETFs. First JPMorgan Equity Premium Income ETF (JEPI)<\/strong> in 2020 and then JPMorgan Nasdaq Equity Premium ETF (JEPQ)<\/strong> in 2022. Tempting, I know! But should we hitch our retirement wagon to the guy who consumes regional banks for brunch (at a discount no less)?<\/p>\n

Well, let\u2019s do something we rarely see elsewhere. Let\u2019s look at these funds\u2019 holdings<\/em> and actual strategies<\/em>.<\/p>\n

First, the flagship JEPI. Pretty simple\u2014it buys and holds blue-chip dividend payers like Microsoft (MSFT)<\/strong>, Hershey (HSY)<\/strong> and Mastercard (MA)<\/strong>.<\/p>\n

If we were mere<\/em> mortals and bought these stocks outright, we\u2019d net yields of 0.9%, 1.6% and 0.6% respectively. Which is better than stuffing cash under our mattresses, but not by much.<\/p>\n

How does Dimon create a 9.4% headline yield from such modest dividends? One that he pays monthly<\/em>, no less?<\/p>\n

Well, if we listen to his henchman management team, they\u2019ll tell us that JEPI \u201csells options and invests in US large cap stocks.\u201d Okaaayyy\u2026 So really what they\u2019re doing is selling puts and writing covered calls to juice cash flow.<\/p>\n

In doing so, they\u2019re giving up the potential for big gains. When we write covered calls, we\u2019re collecting income now<\/em> in exchange for agreeing to sell<\/em> at a higher price later.<\/p>\n

The JPM team also alludes to some \u201clight\u201d market timing. Underweight this, overweight that (finger in the air if you ask me). Which is okay, but not something that we are going to rely on. We\u2019re considering JEPI (and JEPQ) for the dividend. We want income that supports these payouts.<\/p>\n

It is possible to generate these types of payouts from call and put writing. But there is not a free lunch here. If the market drops, these funds are going down too.<\/p>\n

Since inception, JEPI has delivered a total return of 44% (including dividends) versus 49% for the S&P 500. The fund has underperformed the market while it\u2019s been hot and done \u201cless poorly\u201d during the recent bear market.<\/p>\n

JEPI is really only a buy if you believe the market is going to trade higher in the months ahead. Buying blue-chip stocks and selling options on them works great in a bull market. When prices rise, there is plenty of income to dish out.<\/p>\n

And sure, the strategy does well enough in sideways markets, too. It\u2019s better than buying and holding these low-yielding blue chips. When stock prices meander, it makes sense to scrape some option premiums from them.<\/p>\n

But when markets crash<\/em>, JEPI is not<\/em> where we want to be. Between April 21 and June 17, 2022, the fund lost 13%. Sure, it kept paying its monthly dividends, but its price dropped faster.<\/p>\n

It was a similar story with cousin JEPQ. This fund focuses on tech stocks, which tend to command higher option premiums. So, it pays even more\u2014a 12.5% headline yield!<\/p>\n

JEPQ comes with some heartburn. Fortunately for the fund\u2019s track record, it didn\u2019t launch until May 2022, avoiding the first four months of tech carnage. Still, the fund would soon find itself 16% lower on a total return basis.<\/p>\n

So yes, these funds are reliable dividend payers. But that doesn\u2019t mean we always<\/em> want to buy them.<\/p>\n

I lump JEPI and JEPQ in with a closed-end fund like Gabelli Dividend & Income (GDV)<\/strong>. I love buying GDV at major market lows. Sure, the fund pays its monthly dividend whether it\u2019s a bull or bear\u2014but why deal with price declines if we don\u2019t have to?<\/p>\n

Which is why I\u2019d prefer to wait on JEPI and JEPQ. Big boss Jamie seems to get all of the best deals. Let\u2019s wait him out and secure one for ourselves! Now pardon me while I roll down my window and turn up some Phil Collins.<\/p>\n

Brett Owens is chief investment strategist for <\/em>Contrarian Outlook<\/em>. For more great income ideas, get your free copy his latest special report: <\/em>Your Early Retirement Portfolio: Huge Dividends\u2014Every Month\u2014Forever.<\/p>\n

Disclosure: none<\/em><\/p>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

We were only a minute into our home-from-school commute. But I wasn\u2019t going to last seven more. \u201cHey!\u201d I asserted in my dad voice. \u201cIf I hear any more whining about the air conditioning, it\u2019s going off. And we\u2019re rolling down the windows. And\u2026\u201d I paused for effect and soaked in the temporary silence. \u201cWe\u2019ll […]<\/p>\n","protected":false},"author":1,"featured_media":16748,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[239],"tags":[83],"class_list":["post-16747","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing","tag-featured"],"yoast_head":"\nBut Are These Dividends Safe? | iFintechWorld<\/title>\n<meta name=\"description\" content=\"We were only a minute into our home-from-school commute. 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