JEPI - Retirement Passive Income: JEPI Vs. DIVO

2023-07-20 08:00:00 ET

Summary

• DIVO and JEPI are highly popular high yield ETFs, especially for retirees.
• In this article, we compare their pros and cons with each other.
• We conclude by sharing which set of investors are better served buying DIVO and which set of investors are better served buying JEPI.

Both the Amplify CWP Enhanced Dividend Income ETF ( DIVO ) and the JPMorgan Equity Premium Income ETF ( JEPI ) are popular high yield funds for income-oriented investors - especially retirees - for the following reasons:

• They both pay out monthly distributions
• Both offer attractive yields
• Both use covered calls to enhance distribution payouts
• Both support their payouts with well-diversified stock portfolios that also offer the potential to deliver capital appreciation over the long-term.
• Both provide retirees with a totally passive investing experience, with no need to understand business models or valuation techniques or spend time analyzing balance sheets and earnings calls.

In this article, we will compare these passive income funds side by side and share our view on which is the better high yield passive income buy.

DIVO Vs. JEPI: Track Record Analysis

DIVO has outperformed JEPI over the course of JEPI's lifespan, though both have trailed the S&P 500 ( SPY ) as well as gold standard dividend ETF Schwab U.S. Dividend Equity ETF ( SCHD ):

DIVO is a bit older than JEPI, but even over its full lifespan it has still underperformed SPY and SCHD:

When it comes to dividend and principal stability - both very important traits in income funds - DIVO outperforms JEPI according to both of these metrics, though the sample period is fairly short:

Overall, DIVO appears to be a superior fund to JEPI for investors looking for sustainable distributions from a fund that implements a covered call strategy while also putting substantial priority on total returns and principal preservation.

DIVO Vs. JEPI: Portfolio Analysis

DIVO's portfolio is weighted more heavily towards financials, health care, consumer goods, and energy than JEPI's is, whereas JEPI's is weighted more heavily towards technology, industrials, utilities, communications, basic materials, and real estate than DIVO's is.

JEPI's portfolio is overall much more diversified than DIVO's, with 135 total holdings and only 15.25% exposure to its top 10 holdings in contrast to only 42 holdings for DIVO and 56.35% exposure to its top 10 holdings. That said, DIVO's top 10 holdings concentration is a bit overstated given that its top holding at 10.65% of its total portfolio is an ultra low risk short-term government bond position. Still, when discounting that position, DIVO still has 51.15% of its remaining portfolio tied up in its top 9 stock positions.

What that means is that investors who choose DIVO need to have significant conviction in the nine stocks named in its top 10 holdings list above on top of confidence in DIVO's investing strategy.

DIVO Vs. JEPI: Strategy Analysis

Beyond portfolio construction differences, another big difference between DIVO and JEPI is that DIVO's dividend yield - while still pretty attractive - is much lower than JEPI's at 4.7% vs. 7.8% (after annualizing the latest month's dividend payout). This is due to the fact that DIVO is not as aggressive with its covered call writing strategy, resulting in less covered call premiums for distribution to shareholders.

DIVO's goal is to provide shareholders access to an actively managed portfolio that generates 2-3% per year in dividend income and another 2-4% in dividend income from options premiums. DIVO picks stocks that are relatively low risk thanks to their high quality, large cap nature and history of dividend and earnings growth. It then seeks to allocate weightings across its portfolio in order to create a well-diversified portfolio based on industry exposure while also tactically writing covered calls on individual stocks in an attempt to increase the portfolio's income generation.

In contrast, JEPI implements a more "blind" covered call strategy whereby it sells out of the money call options on the S&P 500 instead of on individual stocks in its portfolio. JEPI also utilizes equity-linked notes in addition to its S&P 500 covered calls strategy.

Last, but not least, JEPI beats DIVO in an important category: fees. While DIVO charges a 0.55% expense ratio, JEPI charges investors a 0.35% expense ratio.

Investor Takeaway: Which Is The Better Buy?

DIVO clearly wins the competition from the total return, dividend consistency, and capital preservation standpoints. Moreover, its portfolio is more actively managed than JEPI's.

In contrast, JEPI charges a meaningfully lower expense ratio and also offers investors a higher yield, even if its payout is a bit more volatile on a month-to-month basis than DIVO's is.

Another major consideration is that JEPI has significantly greater diversification than DIVO.

Ultimately, the choice between these two ETFs boils down to:

• If you trust DIVO's management team to pick good stocks and good times to sell calls and only need a 4-5% annualized distribution for your income needs, DIVO is a superior investment.
• If you do not trust DIVO's management team to be a skillful steward of your capital and/or want greater diversification along with a higher yield, lower fees, and pretty mediocre total returns, JEPI is the better choice.

Ultimately, we view JEPI as the more conservative choice of the two given its greater diversification and lower fees along with less management risk. However, DIVO does offer investors the chance of outperformance that active management can produce. Thus far, DIVO has done a pretty good job of balancing its goal of providing generous and dependable income to shareholders while still generating a total return that has not lagged the S&P 500 by very much. However, the higher fees and higher concentration in its highest conviction picks makes it a more risky proposition that not all investors may be comfortable with.

If we were to pick one of these two, we would pick JEPI simply because of the lower fees. However, we prefer to do our own stock picking to build our high yield portfolio and have generated market-crushing returns alongside an 8% dividend yield in the process.

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