I have invested in dividends for over 10 years; These 5 dividend ETFs are now my ride-or-die portfolio core

For the past decade, exchange trade funds (ETF) that track major stock exchanges have done very well serving as wealth building platforms for millions of investors. With the S&P 500, the Nasdaq 100, the  Russell 2000 and other indexes all delivering solid double digit annual gains, their corresponding ETFs have been at the forefront of countless portfolios, including those owned by investment icons like Warren Buffett.

However, retirees and conservative investors seeking income for living expenses or just as an investment hedge may feel left out – the paltry dividends from pure stock index ETFs are negligible, yet their double digit gains are reliable portfolio asset growth factors that are essential for staying ahead of inflation. 

The popularity of the ultra high dividend YieldMax ETFs flipped the script and made covered call dividends themselves into a wealth building platform through dividend compounding. However, the caveat is that a significant number of them have lost Net Asset Value and some market prices have dropped over 70% from inception. 

Since 2023, covered call versions of major index ETFs have debuted, and they may very well represent the best of both worlds. With double digit yields combined with 65% or more of the gains of their conventional ETF counterparts, they bear serious consideration from retirees and other income-oriented investors who also want growth in an ETF but are dissatisfied with single digit yields. 

ProShares S&P 500 High Income ETF

The S&P 500 Index has been a benchmark for wealth building for many years, and has been lauded by countless economists, investors, and advisors, most notably, Warren Buffett. Many of these investors choose either Vanguard S&P 500 ETF (NYSEARCA: VOO) or SPDR S&P 500 ETF (NYSEARCA: SPY | SPY Price Prediction) for their S&P 500 index investments. 

ProShares S&P 500 High Income ETF (NASDAQ: ISPY) is intended to track the S&P 500 Index. ISPY combines a sizable percentage of comparable market fluctuations of the Index along with generating monthly dividend payouts with a 10% APY (at the time of this writing). This is the result of the daily call option sales managed by ProFunds and paid for by the expense ratio. Although its inception was in December, 2023, ISPY delivers a fair majority of SPY’s upside.

ISPY                                                                           SPY

As the comparison shows: 

• 1-year trailing return of ISPY is 65% of SPY.
• 1-year total return of ISPY is 71% of SPY.
• YTD Return of ISPY is 71% of SPY.
• Dividend Yield of ISPY is over 9X higher than that of SPY.

ProShares Russell 2000 High Income ETF

Launched in September, 2024, ProShares Russell 2000 High Income ETF (CBOE: ITWO) is the latest addition to the ProShares High Income covered call ETF catalog. In its press release announcement, the company described its covered call strategy thus: “While traditional covered calls allow investors to hold long positions for a month on the securities they’re selling options for, with daily options, investors can sell every day and take advantage of the underlying stocks’ rising prices over the month. If they were holding an option on a longer holding, the rising price of the underlying security means they’d be exposed, having to sell to the option holders at the lower price.” 

Due to the fact that the Russell 2000 Index tracks small-cap companies, it has a much higher volatility level than either the Nasdaq 100 or the S&P 500 indices. ITWO’s trajectory displays 

this explicitly: within two and a half months of its debut, it was up over 12%. After the initial reciprocal tariff policy announcements, ITWO was down -15%, only to come back into the black at the time of this writing. With that kind of volatility, it’s no surprise that the daily covered call premiums have been lucrative, making ITWO the highest yielding ETFs in the ProShares catalog, despite being the youngest. iShares Russell 2000 ETF (NYSEARCA: IWM) is a $70 billion AUM ETF that tracks the Russell 2000 Index. 

ITWO                                                                            IWM

As the comparison shows: 

• 1-year trailing return of ITWO is 85% of IWM.
• 1-year total return of ITWO is 88% of IWM.
• YTD Return of ITWO is 107.5% of IWM (ITWO exceeds IWM)
• Dividend Yield of ITWO is over 14X higher than that of IWM.

NEOS NASDAQ 100 High Income ETF

The Nasdaq 100 Index is an index that features the top Nasdaq exchange listed stocks, weighted by market cap. As tech stocks, such as the “Magnificent 7” and biotech stocks dominate the Nasdaq’s largest rankings, the Nasdaq-100 Index is considered to be much more aggressive and volatile than the S&P 500, which counts a sizable number of financial, retail, consumer, and other industrial companies that are huge through longevity, although modest in their appreciation when compared to high-flying tech securities. The Invesco QQQ Trust (NASDAQ: QQQ) has been the flagship Nasdaq 100 index ETF since 1999. 

Although it only debuted in January, 2024, the NEOS NASDAQ 100 High Income ETF (NASDAQ: QQQI) already has amassed over $5.29 billion AUM. QQQI also utilizes a covered call strategy, in addition to out of the money call purchases to augment upside gains. QQQI writes its covered calls directly against the NASDAQ-100 index up to 100% of the equity value of total QQQI holdings. The fund then uses a portion of its covered call premium income to purchase out of the money call options. This gives it the following result scenarios:

• If the market ends relatively flat, QQQI has kept the premium income minus the cost of the out of the money options. 
• If the market jumps up, the underwritten covered call is already hedged against stocks, but QQQI can take profit on the out of the money call that ostensibly would be in the money due to the jump. 

QQQI                                                                   QQQ

As the comparison shows: 

• 1-year trailing return of QQQI is 94% of QQQ.
• 1-year total return of QQQI is 96.5% of QQQ.
• YTD Return of QQQI is 86%% of QQQ
• Dividend Yield of QQQI is over 28.9X higher than that of QQQ.

JP Morgan Nasdaq Equity Premium Income ETF

Ray Dalio’s phenomenal success at the help of hedge fund Bridgewater Capital has garnered legions of followers who read his blogs and watch his interviews to mine kernels of investing wisdom tips. Dalio, Tony Robbins, and other success gurus have mentioned their ideal “Holy Grail” investment – a portfolio of strong returns with mitigated risks. 

The very popular JP Morgan Equity Premium Income ETF (NYSE: JEPI) is one of the few ETFs that have even appeared on Fox Business News tv ads. It is a fund that cherry picks solidly reliable dividend paying stocks from the S&P 500 Index. Attention is paid to those stocks that aren’t overly volatile. It then uses 20% of its funds to sell out of the money call options against the stocks. The strategy is predicated on the stocks’ slow volatilities, with the majority of the options expiring worthless. Thus, extra income is derived from the portfolio stocks beyond their intrinsic appreciation over time. The premiums earned from selling the options mathematically reduce the cost basis of each stock accordingly. However, in the quest for even greater dividend yields, JP Morgan created the  JP Morgan Nasdaq Equity Premium Income ETF (NASDAQ: JEPQ) in May, 2022. 

Since the Nasdaq-100 Index is led by the famous “Magnificent 7” tech stocks (Apple, Amazon, Alphabet (Google), Microsoft, Meta Platforms (Facebook), Nvidia, and Tesla), the overall growth trajectory of JEPQ is not a surprise. The added component to JEPQ’s value, especially if one is using a compounding strategy for wealth building, is its hefty dividend, which is yielding 10.57% at the time of this writing. JEPQ achieves these yields through the use of Equity Linked Notes (ELN), which are synthetic financial products created by financial institutions. ELNs can be likened to customized options with a principal protection component, a relatively short expiration date, and are linked to a specified underlying stock or index. Due to the short expiration dates, the call premiums accrue monthly, and are paid out as dividends accordingly. 

JEPQ manager Hamilton Reiner staggers one-month calls into multiple weekly buckets, then diversifies the expiration dates and strike prices. Instead of direct covered call writing, Reiner purchases ELNs that give JEPQ  exposure to the profits on those call options, without the risk of any of the top tech stock holdings being subject to calls if the market takes off and the calls go in-the-money. Thus, there is an added risk mitigation component exercised, fulfilling the other leg of the Dalio “Holy Grail” description. 

JEPQ                                                                       JEPI

As the comparison shows: 

• 1-year trailing return of JEPQ is 446% of JEPI (JEPQ exceeds JEPI)
• 1-year total return of JEPQ is 446% of JEPI (JEPQ exceeds JEPI)
• YTD Return of JEPQ is 199% of JEPI (JEPQ exceeds JEPI)
• Dividend Yield of JEPQ is 26% higher than that of JEPI

JP Morgan Chase acknowledges the attractive combination of high yields with solid growth and mitigated risks. In fact, it is marketing JEPI and JEPQ together as a blended package on the JP Morgan Chase website. 

Fidelity High Dividend ETF

There are also similar ETFs that outpace their peers without the use of covered calls, but  through superior management strategies. Despite tracking similar indexes, the differences can be measurable and significant for some portfolios. 

For those investors who have found the S&P 500 Index too volatile for their liking, there is another index that offers steady growth, albeit at a slower pace, combined with a strong income component and lower volatility. The S&P U.S. Dividend Growers Index is one such benchmark. Containing Dividend Kings (50 or more consecutive years of increased dividends) and Dividend Aristocrats (25 or more years in a row of increased dividends), this index sports Fortune 500 companies whose businesses are sufficiently and historically so profitable that they can afford to continue higher dividend payouts year after year. The Vanguard Dividend Appreciation Index Fund ETF (NYSE: VIG) is a popular ETF with a portfolio reflecting this exact index. 

Founded in 2006, the Vanguard Dividend Appreciation Index Fund ETF strives for a mix of capital appreciation and income from dividend growth companies, i.e. those with a history of dividend increases accompanying growth. Surprisingly, the top 25% companies with the highest yields are excluded from the 330+ stocks on the VIG roster. VIG has a Morningstar gold ETF ranking. It has $115 billion AUM as of the time of this writing. Another plus to VIG is that since it contains both current and potential future Dividend King and Dividend Aristocrat stocks, the dividend amounts will continue to grow with each passing year. 

That said, VIG has an ETF rival whose shadow it is currently chasing. The Fidelity High Dividend ETF (NYSEARCA: FDVV). While it also tracks high dividend growth rate large-cap stocks, its portfolio allocation ratio devotes 70% to dividend yield, 15% to payout ratio, and 15% to dividend growth. Mathematically, including the payout ratio vs. overall growth and net cap weightings allows for FDVV to include some “Magnificent 7” stocks, which jet fuels its returns. 

FDVV                                                                    VIG

As the comparison shows: 

• 1-year trailing return of FDVV is 21.5% higher than VIG 
• 1-year total return of FDVV is 37.7% higher than VIG
• YTD Return of FDVV is 15.21% higher than VIG 
• Dividend Yield of FDVV is 88% higher than VIG

 Whether one wants to mix and match for a portfolio, as advised by JP Morgan Chase, or try to have one’s cake and eat it too, ETF diversification and upside combined with yields is a reality that appears to have arrived. Among major indexes, one can now find an ETF that covers all of the Ray Dalio “Holy Grail” criteria, if that is their inclination.