We were only a minute into our home-from-school commute. But I wasn’t going to last seven more.
“Hey!” I asserted in my dad voice. “If I hear any more whining about the air conditioning, it’s going off. And we’re rolling down the windows. And…”
I paused for effect and soaked in the temporary silence.
“We’ll drive home like it’s the 1980s.”
Two small gasps emerged from the back seat. My threat appeared to hit home.
My kids know from household folklore that car rides in the ‘80s were no joke. Seat belts were present, but not required. Smoking in the driver’s seat was common. And there was limited automotive air conditioning.
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.
Off went the A/C. Down went all four windows. Dad may not be flawless, but he does not make empty threats.
We spent the rest of the commute with 91-degree air in our faces.
Hey, it could have been worse. It could have been July. My oldest, resigned to a warm but survivable drive, made conversation.
“Dad, how did windows go down in the ‘80s?” I described the primitive technology we used—a roller that required all of the arm strength a young one could muster:
“No buttons, hon,” I explained. “You had to put your entire arm into the thing.”
But I was not done. Time to lay it on thick. “And even then. You hoped the window would go down all the way. Often, it got stuck mid-journey.”
Kids these days. Mine will never manually roll down their own windows.
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.
It’s exciting. Quite the time to be alive! But we must be careful—even when these fat yields come synthetically packed in the form of neat tickers from JPMorgan (JPM):
No my contrarian friend, we did not have funds like these back in the ‘80s. Heck, if we saw a yield of 9.4% or, heaven forbid, 12.5%, we’d have assumed the worst!
Fast forward to the 2020s, when Jamie Dimon and his team launched these ETFs. First JPMorgan Equity Premium Income ETF (JEPI) in 2020 and then JPMorgan Nasdaq Equity Premium ETF (JEPQ) 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)?
Well, let’s do something we rarely see elsewhere. Let’s look at these funds’ holdings and actual strategies.
First, the flagship JEPI. Pretty simple—it buys and holds blue-chip dividend payers like Microsoft (MSFT), Hershey (HSY) and Mastercard (MA).
If we were mere mortals and bought these stocks outright, we’d net yields of 0.9%, 1.6% and 0.6% respectively. Which is better than stuffing cash under our mattresses, but not by much.
How does Dimon create a 9.4% headline yield from such modest dividends? One that he pays monthly, no less?
Well, if we listen to his henchman management team, they’ll tell us that JEPI “sells options and invests in US large cap stocks.” Okaaayyy… So really what they’re doing is selling puts and writing covered calls to juice cash flow.
In doing so, they’re giving up the potential for big gains. When we write covered calls, we’re collecting income now in exchange for agreeing to sell at a higher price later.
The JPM team also alludes to some “light” 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’re considering JEPI (and JEPQ) for the dividend. We want income that supports these payouts.
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.
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’s been hot and done “less poorly” during the recent bear market.
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.
And sure, the strategy does well enough in sideways markets, too. It’s better than buying and holding these low-yielding blue chips. When stock prices meander, it makes sense to scrape some option premiums from them.
But when markets crash, JEPI is not 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.
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—a 12.5% headline yield!
JEPQ comes with some heartburn. Fortunately for the fund’s track record, it didn’t 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.
So yes, these funds are reliable dividend payers. But that doesn’t mean we always want to buy them.
I lump JEPI and JEPQ in with a closed-end fund like Gabelli Dividend & Income (GDV). I love buying GDV at major market lows. Sure, the fund pays its monthly dividend whether it’s a bull or bear—but why deal with price declines if we don’t have to?
Which is why I’d prefer to wait on JEPI and JEPQ. Big boss Jamie seems to get all of the best deals. Let’s wait him out and secure one for ourselves! Now pardon me while I roll down my window and turn up some Phil Collins.
PS—While we wait on JEPI and JEPQ, we should instead focus on these 8%+ monthly payers flashing buy signals right now. Like the JPM funds, these dividends dish monthly. Unlike Dimon’s funds, my monthly dividend machines can survive a bear market just fine. Let’s chat about my monthly dividend superstars here.