Most income investors are used to waiting. They buy a dividend stock, mark the calendar, and collect a check every three months. That schedule works, but it does not line up with life’s monthly rhythm of rent, insurance, and grocery bills.
Monthly-paying exchange-trade funds (ETFs) are becoming popular for that reason. Not only are they more convenient, but they also compound faster.
On top of that, many ETFs that pay monthly often come with some of the highest sustainable yields. Having them in your portfolio is now an essential, considering core inflation is at 3.1%, so the true risk-free rate remains 1% to 2%. Keeping the following three high-yield monthly ETFs in your portfolio can put you ahead of inflation and then some.
JPMorgan Equity Premium Income ETF (JEPI)
There are thousands of ETFs in the market today, but none get you what many of these novel monthly-pay dividend ETFs do. What if an ETF could deliver the same blue-chip exposure investors already want, while paying them a yield that is 2-3 times higher than high-grade bonds?
A new cohort of ETFs invests in familiar names, with the twist being that they use options to squeeze out high single-digit to double-digit yields. You get market participation with a monthly paycheck that most dividend aristocrats, REITs, or utility stocks cannot match on their own.
The JPMorgan Equity Premium Income ETF (NYSEARCA:JEPI) is one of these monthly dividend ETFs. It is an actively managed fund that combines a defensive portfolio of U.S. large-cap stocks with a systematic options-selling strategy, while seeking to deliver lower volatility than the broader market.
It uses a bottom-up fundamental research process based on proprietary risk-adjusted stock rankings to identify low-volatility, value-oriented stocks with attractive risk/return characteristics.
Then, it uses an options overlay to sell one-month, out-of-the-money call options on the S&P 500 Index. These call options are designed to generate distributable monthly income from the premiums collected. The fund manager staggers these one-month calls into multiple weekly buckets to diversify expiration dates and strike prices.
Rather than directly writing call options, JEPI purchases equity-linked notes that provide exposure to the profits on those call options. This approach simplifies the fund’s tax treatment, though it precludes the fund from taking advantage of lower long-term capital gains rates.
And in the end, JEPI gets you an 8.4% dividend yield. The expense ratio is also low at 0.35%, or $35 per $10,000.
The ETF can invest in stocks outside the S&P 500 as needed.
Invesco S&P 500 High Dividend Low Volatility ETF (SPHD)
The Invesco S&P 500 High Dividend Low Volatility ETF (NYSEARCA:SPHD | SPHD Price Prediction) is built for investors who want the best of both worlds: above-average income and a smoother ride than the overall market. The SPHD fishes out the market’s most generous dividend payers and gets rid of volatile stock. Plus, it caps sectors at 25% of the portfolio and 10 stocks each.
Instead of simply buying the whole S&P 500, SPHD starts with the 75 highest-yielding stocks in that index and then keeps only the 50 that have shown the lowest share-price volatility over the trailing 12 months. The result is a yield-weighted portfolio that currently pays a 3.65% yield. The expense ratio is also low at 0.30%, or $30 per $10,000.
That’s more than 3 times the yield of the broad S&P 500 while getting you noticeably smaller price swings.
In roaring bull markets dominated by tech and other high-growth sectors, SPHD will probably lag cap-weighted indexes. However, the heavy tilt toward real estate, consumer staples, and utilities can complement growth-centric core holdings.
Global X SuperDividend ETF (SDIV)
Global X SuperDividend ETF (NYSEARCA:SDIV) is built for maximizing cash in your pocket right now above all else. It buys the 100 highest-yielding dividend stocks on the planet, weights them equally, and sends you the income every single month.
The yield is exactly 10% as of this writing. The expense ratio is 0.58%, or $58 per $10,000.
The trade-off, of course, is that sky-high yields rarely come from rock-solid blue-chips. Many holdings are smaller, cyclical, or emerging-market names whose share prices drift sideways or downward over time.
If you need the cash and can tolerate principal volatility (or simply don’t care about price as long as the checks keep clearing), that may be fine. Otherwise, a lower-yielding dividend-growth ETF might fit better.
If interest rate cuts come very fast, SDIV may deliver good upside as investors get hungry for yield. In this case, it may repeat the performance from mid-2020 to early 2021.
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