Investing Your Tax Return? Check Out This 11.8%-Yielding ETF

Tax season is upon us once again. If you are getting a tax return, why not consider investing it in a dividend ETF?

Using your tax return to buy a high-yielding dividend ETF can help you to jump-start your own dividend portfolio. Investing in a dividend ETF like the JPMorgan Equity Premium Income ETF (NYSEARCA:JEPI) gives you access to a diverse array of dividend stocks and pays you passive income on a monthly basis, which helps compound your wealth over time. Here’s why you should consider allocating your tax return to an ETF like JEPI in order to give your future self some serious passive income.

The Gift That Keeps on Giving

If you’re looking to get started as a dividend investor with an influx of tax return money, JEPI is a pretty good place to start. While the majority of dividend stocks and dividend ETFs pay dividends on a quarterly basis, this popular ETF pays them each month. I own JEPI, and what I like about this cadence is that by the time I receive the monthly dividend and reinvest it, I know it’s only going to be a few more weeks until I get the next one. 

Even better, JEPI boasts a massive dividend yield — currently just under 12%. Think of it this way — each month, you are essentially receiving 1% of your investment in dividend payments. According to the internal revenue service (IRS), the average tax return so far in 2023 has been $2,933. If you put that $2,933 ETF into JEPI at its current price with a yield of 11.8%, you could expect to earn about $29 a month in dividend payments over the course of the next year, making this the gift that keeps giving.

Furthermore, by reinvesting these dividends (which many online brokerages allow you to do automatically) and adding more fresh capital over time, you can compound the size of your dividend portfolio and watch it snowball over time.

What is JEPI’s Strategy?

JEPI seeks to generate income while mitigating volatility and downside. According to JEPI’s factsheet, which can be found on JPMorgan’s website, the ETF “generates income through a combination of selling options and investing in U.S. large-cap stocks, seeking to deliver a monthly income stream from associated option premiums and stock dividends.” JEPI also looks to “deliver a significant portion of the returns associated with the S&P 500 index with less volatility.”

A Collection of Blue-Chip Dividend Stocks

JEPI is a diversified ETF with 121 holdings. Its top 10 holdings make up a minuscule 17.5% of the fund. Below is an overview of JEPI’s top holdings, using TipRanks’ holdings tool, which gives investors a birds-eye view of key data about an ETF’s components. 

As you can see, there are plenty of blue chip dividend stocks here, such as consumer staples giants like Coca-Cola, Pepsi, and Hershey. Abbvie and UnitedHealth represent the healthcare sector within the top 10, and payment networks Visa and Mastercard also find a home within JEPI.

While there are a lot of value stocks here, even a higher-growth sector like tech is represented through the likes of Microsoft and Alphabet (which is interesting because Alphabet is not a dividend stock). 

You can really see the overall quality of JEPI’s holdings when you look at the Smart Scores of its individual components. Hershey, Visa, and Alphabet enjoy ‘Perfect 10’ Smart Scores, while Coca-Cola, Pepsi, Mastercard, and Microsoft all boast Smart Scores of 8 or above, which is equivalent to an Outperform rating.

The Smart Score is TipRanks’ proprietary quantitative stock scoring system that evaluates stocks on eight different market factors. The result is data-driven and does not involve any human intervention. 

What’s the Price Target for JEPI Stock?

Analysts collectively have a Moderate Buy rating on JEPI, and the average JEPI stock price target of $61.43 represents upside potential of ~14% from here.

TipRanks uses proprietary technology to compile analyst forecasts and price targets for ETFs based on a combination of the individual performances of the underlying assets. Further, TipRanks calculates a weighted average based on the combination of all the ETF’s holdings. The average price forecast for an ETF is calculated by multiplying each individual holding’s price target by its weighting within the ETF and adding them all up.

A Word to the Wise

One important thing that investors should be aware of is that JEPI also achieves this high yield by investing up to 20% of its assets into ELNs (equity-linked notes) and selling call options with exposure to the S&P 500. This isn’t a cause for concern in and of itself, but it’s something investors should be aware of. While this strategy has been very successful at generating income and it successfully preserved investor capital during last year’s downturn (JEPI lost just 3.5% while the S&P 500 lost about 20%), it will likely cap some of JEPI’s upside in an environment where stocks are soaring. 

Still, JEPI has a lot of appeal as a dividend generator that can really boost the yield of your portfolio, and I own it in my IRA so that I can receive monthly payouts and not worry about taxes on them.

A Smart Way to Use Your Tax Return

Using your tax return to start a dividend portfolio is a smart way to put your money to work for you. And if you’re looking to kickstart a new dividend portfolio, it’s hard to beat JEPI’s double-digit yield and monthly payout. Plus, JEPI gives you instant diversification with its strong collection of over 100 stocks.

While there are other monthly dividend ETFs on the market with high yields, many of their long-term track records leave a lot to be desired in terms of total returns, whereas for JEPI, things are “so far so good” since its launch in 2020. I also like that JEPI’s top holdings are largely comprised of blue-chip stocks that you can count on, like Coca-Cola and Pepsi, instead of reaching into some of the riskier parts of the market in search of yield.

Disclosure