SCHD’s Dividend Growth vs. JEPI’s 8.16% Yield – Which Strategy Wins for Retirees?

Retirees face a quandary when they look at dividend ETFs. They can either go for high yield now through the JPMorgan Equity Premium Income ETF (NYSEARCA:JEPI), or they can play the long game and “snowball” their dividend income over a longer period of time with the Schwab US Dividend Equity ETF (NYSEARCA:SCHD | SCHD Price Prediction).

Both strategies have merit, but it’s worth running the numbers for both to see where you may end up with these ETFs. It’s also important to discuss the risks that both carry, and whether or not that’s worth the yield.

Let’s do just that.

The pros and cons of the JPMorgan Equity Premium Income ETF (JEPI)

The most obvious advantage of the JEPI ETF is the exceptionally high dividend yield of 8.16%. You also get upside potential alongside that fat dividend yield, which very few other ETFs give outside of covered call ones.

As a result, if you invest $200,000 from your portfolio into JEPI, you’re going to get $16,320 per year. That’s a huge amount that will take you double or even triple the money with most other dividend ETFs. Dividends are distributed on a monthly schedule, so this lines up perfectly with most people’s budgets.

JEPI derives this yield by first holding a portfolio of defensive, lower-volatility stocks that its managers believe will hold up better than the broader market. It then sells out-of-the-money call options on the S&P 500 Index instead of the individual stocks it owns. To do this, it uses Equity Linked Notes (ELNs) that mimic the returns of selling these call options.

The disadvantage is that you get capped upside, but it does not cap the downside risk as much. The result is that JEPI does very well when Wall Street has its rose-tinted glasses on. You get both yield and upside, and the ETF looks hard to top.

But if and when the stock market starts seriously declining, it may take you significantly longer to recover due to the capped upside. Another risk that is unlikely but would be totally destabilizing would be a 2008-style ban on short-selling. The spillover effects on options and ELNs could make JEPI tumble.

The pros and cons of the Schwab US Dividend Equity ETF (SCHD)

SCHD is a more tried-and-tested strategy. The ETF is nowhere near as aggressive as JEPI, and this is exactly why it hasn’t performed the best in recent years. SCHD is down 4% over the past year. It is barely up 2% from January 2022 prices to today. If you compare these returns to those of JEPI, it looks small.

But again, JEPI has only been around for a handful of years, whereas SCHD is more proven. It does not use covered calls and generates its income from its holdings directly. The impact of a downturn on this ETF is far more predictable. SCHD is very likely to at least keep up with the market or outperform it during a recession due to its defensive characteristics. It will also have no issue recovering, as its upside is not capped.

A few years of underwhelming returns shouldn’t disqualify this great ETF. SCHD comes with a 3.77% dividend yield and will get you long-term upside and defense that very few other ETFs can match without using a covered call strategy of some kind.

The expense ratio is ultra-low at 0.06%, or $6 per $10,000.

SCHD or JEPI, which one should you choose now?

I believe it pays to go contrarian today. JEPI has done very well over the past few years due to a ceaseless stock market rally. However, we may be moving into a tougher environment. JEPI will struggle to keep up since the capped upside makes it harder and harder for the ETF to break even. Even if you reinvest your high dividends, it can take far longer to recover.

SCHD may be underperforming now, but if the stock market starts plateauing and correcting, Wall Street will pile into the stocks that SCHD holds. That’s because they have very defensive underlying fundamentals.

I would only consider JEPI over SCHD if you are in your 80s and you wish to spend the latter stage of your retirement more lavishly. Even then, a better strategy would be to use covered call ETFs like JEPI as satellite holdings, while maintaining your core holdings in something like SCHD.