JEPI - Skip JEPI And Buy These 3 Dividend ETFs

2023-04-20 09:05:00 ET

Summary

• JEPI can be a solid income-producing investment for the near term but will lag over the long term.
• Dividend ETFs we look at today provide dividend growth, high yield, and total return potential.
• All 3 of these Dividend ETFs are different enough to hold all in your portfolio.

JEPI: The Income Play

The JPMorgan Equity Premium Income ETF otherwise known as JEPI , has been a hot topic within the dividend community for a little while now. For some, JEPI could be a solid income producing investment, but for those of you with a 5-10+ year time horizon, JEPI will likely lag due to how it is constructed.

JEPI pays a high distribution yield north of 11%, which is what attracts many investors new and old, but you need to understand more about this ETF.

In a volatile market, with a lot of near term uncertainty, JEPI can be a GREAT investment. This is largely due to its high distribution yield. However, in the long-term, the upside is limited to some capacity due to its use of derivatives via ELNs (Equity Linked Notes) and selling call options with exposure to the S&P 500.

What this means in plain English, is that when the market moves higher, eventually, selling call options will cap your upside. If you own a stock at $100 and sell a call option with a strike price of $105, you will collect a premium, but any gains above and beyond $105 you will not partake in.

JEPI owns shares outright of large companies as well, but the use of derivatives is how they are able to juice the distribution yield. The reason I refer to it as a distribution yield and not a dividend yield is because the payout is related to both dividends earned and premiums collected.

Let's take a look at JEPI's top holdings:

In terms of sector breakdown, JEPI has the most exposure to the financial sector, followed by health care, industrial, and information technology.

When the market is trading sideways, or even falling, JEPI can provide solid income to investors, but once things turn around for the S&P 500, I would much rather partake in the total return provided by the three Dividend focused ETFs below.

3 Dividend ETFs I Prefer Over JEPI

Dividend ETF #1 - Schwab U.S. Dividend ETF ( SCHD )

SCHD is a FAVORITE among dividend investors. It is definitely a favorite of mine and a top holding within my portfolio, and I refer to it as an investor's trifecta, as it offers:

1. Share price growth potential

2. Solid dividend yield

3. Strong dividend growth

In terms of SCHD, its checks off a lot of boxes and one of the best parts, the fund has a very low expense ratio of 0.06%. These are fees investors have to pay the management company to manage the fund. SCHD is a low maintenance fund with very little buying and selling, which allows them to charge a low fee.

SCHD over the past 3 years has outperformed both JEPI as well as the S&P 500.

In terms of positions, SCHD has 104 total positions and the top 10 positions make up 41.5% of the entire fund. Those top 10 positions include:

• AbbVie ( ABBV )

• PepsiCo ( PEP )

• Merck & Co ( MRK )

• Verizon Communications ( VZ )

• The Coca-Cola Company ( KO )

• Chevron ( CVX )

• Amgen ( AMGN )

• Pfizer ( PFE )

• United Parcel Service ( UPS )

• Cisco Systems ( CSCO )

The top three sectors of Industrials, Health Care, and Financials make up nearly 50% of the entire fund. Here is a look at the funds full sector breakdown:

In terms of the dividend, SCHD currently yields a dividend of 3.6% , which is a nice yield, but what I love about SCHD is their dividend growth. Over the past five years, the fund has increased the dividend at an average annual rate of 15.6%.

Dividend ETF #2 - iShares Core Dividend ETF ( DGRO )

My favorite type of dividend stock is a dividend growth stock. Having a longer time horizon, dividend growth stocks, although they tend to pay a lower yield, the fast dividend growth allows me to compound my money at a faster rate. In addition, dividend growth stocks tend to provide more share price appreciation potential.

This next dividend ETF, the iShares Core Dividend ETF focuses primarily on companies that consistently grow their dividends. In addition, similar to SCHD, DGRO also offers a very low expense ratio of 0.08%.

Over the past five years, DGRO has went toe to toe with the S&P 500, with a total return of nearly 70%.

DGRO has a lot more holdings than SCHD, more than 4x as many in fact, with total positions amounting to 449.

The top 10 positions make up 26.7% of the entire fund and those top 10 positions include:

• Microsoft Corp ( MSFT )
• Johnson & Johnson ( JNJ )
• Exxon Mobil ( XOM )
• Apple ( AAPL )
• AbbVie ( ABBV )
• Chevron ( CVX )
• JPMorgan Chase ( JPM )
• Pfizer ( PFE )
• Procter & Gamble ( PG )
• The Home Depot ( HD )

The top three sectors include Health Care, Financials, and Technology, which account for roughly 55% of the fund. Here is the full sector breakdown:

As you can see from the top 10 positions, not all stocks are increasing their dividend at a fast rate, but they are increasing it nonetheless. Half of the top 10 I would consider dividend growth stocks, which are stocks increasing their dividend at an annual rate of 10% or more per year.

In terms of the dividend, DGRO offers a dividend yield of 2.4%. Over the past 12 months, investors have enjoyed a 12.3% dividend hike and over the past five years, the average dividend increase is closer to 10%. DGRO has seen the dividend increase for eight consecutive years.

Dividend ETF #3 - iShares Core High Dividend ETF ( HDV )

HDV is yet another ETF that is different from the others we have already looked at as they focus more so on dividend stocks that pay HIGHER dividend yields.

Usually higher yields could equate to lower volatility, which could really bode well in the coming months with a lot of uncertainty in the market ahead.

HDV is yet another ETF that performs well but without having to pay adherent fees. HDV has a low expense ratio of 0.08%.

In terms of holdings, HDV is pretty small with only 81 total positions. The top 10 positions make up 53% of the entire fund, which makes sense given how top heavy the ETF is.

Those top 10 positions are as follows:

• Exxon Mobil ( XOM )

• Johnson & Johnson ( JNJ )

• Verizon Communications ( VZ )

• AbbVie ( ABBV )

• Chevron ( CVX )

• Pfizer ( PFE )

• Broadcom ( AVGO )

• The Coca-Cola Company ( KO )

• Cisco Systems ( CSCO )

• International Business Machines ( IBM )

The top three sectors include Health Care, Energy, and Technology, which together make up more than 65% of the entire ETF. Here is a look at the full breakdown.

So as you can probably already tell based on the name, HDV has a nice high yield of 3.82% based on the dividends paid over the last 12 months. If you annualize the latest quarterly dividend, the yield is actually 4%.

Higher yield dividend stocks USUALLY do not have strong dividend growth, but that is what makes SCHD so unique. It offers a nice yield AND dividend growth.

HDV is more of your traditional high-yield ETF with a five year dividend growth rate of just 6%. The dividend growth over the past 12 months was rather high at 17%.

Investor Takeaway

JEPI is a good option when the stock market is stagnant or you are just looking for a high income play. However, if you are looking for more in terms of total return, you would be better off looking at some higher quality dividend ETFs.

SCHD is the cream of the crop right now as it offers a unique mix of a solid dividend yield combined with strong dividend growth. DGRO is a solid option for those focused strictly on dividend growth. HDV is more of your traditional high-yield dividend ETF, although the dividend growth is not going to be all that high.

Let me know down in the comments which of these ETFs you prefer: JEPI, SCHD, DGRO, or HDV.

Disclosure: This article is intended to provide information to interested parties. I have no knowledge of your individual goals as an investor, and I ask that you complete your own due diligence before purchasing any stocks mentioned or recommended.

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