You’ve probably heard the old market adage to “Sell in May and go away.” Instead, how about using this time to start considering dividend-paying ETFs? There’s no time like the present to start building a dividend portfolio that can set you up with years of passive income.
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Here are two big dividend ETFs that both yield over 11% that you can consider using to jumpstart your dividend portfolio. Even better, while some high-yield ETFs lure investors in with eye-popping yields but then end up providing subpar total returns over the long run, both of these ETFs have posted solid total returns in recent times.
JPMorgan Equity Premium Income ETF (JEPI)
This popular ETF from JPMorgan offers both an eye-catching 11.3% yield and a monthly distribution for investors. Furthermore, unlike some of its high-yield counterparts, it has been solid from a total-return perspective.
The fund fell just 3.5% in 2022, which is a lot better than it sounds, considering that the S&P 500 and Nasdaq were both in bear market territory last year, with the S&P 500 falling 19.6% and the tech-focused Nasdaq losing a third of its value. Prior to that, JEPI posted an impressive total return of 21.5% in 2021, which lagged the S&P 500 and Nasdaq but was still a nice return for investors.
JEPI is suitably diversified, with 116 holdings, and its top 10 positions make up just 17.5% of assets. Below is a look at JEPI’s top holdings using TipRanks’ holdings tool.
As you can see, this is a nice list of some of the U.S.’s top dividend stalwarts. Consumer staples mainstays like Coca-Cola, Pepsi, Colgate-Palmolive, and Hershey are well-known for their stable businesses and long dividend track records. These individual holdings boast a terrific collection of Smart Scores, with 6 out of the 10 featuring Smart Scores of 8 or better.
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 require any human intervention. A Smart Score of 8 or above is the equivalent of an Outperform rating. JEPI itself features an ETF Smart Score of 7 out of 10, very close to being rated an Outperform.
JEPI’s goal is to generate income while limiting volatility and downside. According to the ETF’s factsheet, JEPI “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 seeks to “deliver a significant portion of the returns associated with the S&P 500 index with less volatility.”
It should be noted that JEPI generates much of its high yield by investing in equity-linked notes (ELNs), so this isn’t your plain vanilla dividend ETF. According to the fund’s prospectus, the “ELNs in which the Fund invests are derivative instruments that are specially designed to combine the economic characteristics of the S&P 500 Index and written call options in a single note form and are not traded on an exchange.”
This strategy has worked well so far, but it could limit some of JEPI’s upside in a bull market. Case in point, with the markets rebounding in 2023, JEPI stock has a total return of 3.4% year-to-date, lagging the S&P 500’s total return of 8.3%.
That said, JEPI has done a good job of protecting investor capital during last year’s difficult market. Plus, its double-digit dividend yield, strong portfolio of blue-chip U.S. dividend stocks, and reasonable expense ratio of 0.35% make it a solid option for investors to consider. In a volatile and uncertain market, investors are growing more risk-averse, and JEPI looks like a relative port in the storm.
iShares MSCI Brazil ETF (EWZ)
Here’s an ETF with a totally different strategy than JEPI but a similarly high yield. The iShares MSCI Brazil ETF currently yields 12.5%. As you can guess from the name, this is an ETF from BlackRock’s iShares that invests in Brazilian stocks.
Part of the reason that EWZ’s yield is so high is that the Brazilian stock market plunged after the Brazilian presidential election late last year. On the one hand, the market fears that left-leaning Luis Inacio Lula da Silva (Lula), who defeated right-leaning incumbent Jair Bolsonaro, will be less business-friendly than his predecessor.
While this is a valid concern, this is a large part of the reason why investors are getting a chance to invest in this ETF with an average P/E multiple of 4.6 (as of March 31) and a high yield. This is a huge discount to both the S&P 500 and emerging market stocks in general, so these fears appear to be more than priced into EWZ already. Furthermore, during Lula’s long first term, the Brazilian market actually performed fairly well, and Bolsonoaro’s party still controls Congress, so the market may be overreacting.
EWZ has been a solid performer over the last few years. Even after its sell-off at the end of last year following Lula’s election, the ETF has posted a total annualized return of 13.4% over the past three years (as of the end of the most recent quarter).
One thing for U.S. investors to note is that, unlike many U.S. dividend stocks and ETFs, EWZ pays out its dividend on a semiannual basis rather than quarterly. EWZ has paid its investors a dividend for a venerable 19 years in a row, and it has grown this dividend payout significantly in recent years, with the dividend’s compound annual growth rate (CAGR) coming in at 49.2% on an annualized basis over the last three years and 39.7% over the past five.
EWZ isn’t as diversified as JEPI, with 51 positions and a 58.8% weighting towards its top 10 holdings, and investors should be aware that Vale SA makes up a massive 16.15% of the fund. This isn’t necessarily a bad thing, but it does give investors a lot of exposure to Vale, whether to the upside or downside. The fund is also heavily-weighted toward energy, materials, and financials. That being said, these are sectors known for their dividends, and holdings like Vale and Petrobras boast massive dividend yields.
For risk-tolerant investors who aren’t afraid to go a bit off the beaten path, EWZ is an interesting ETF to consider adding an allocation to, as its 12.5% dividend yield is hard to beat, and there is plenty of room for upside if sentiment towards Brazil changes based on Lula’s policies. Furthermore, there is likely upside to be had here if the energy and material sectors rebound in the future.
Forget About “Sell in May and Go Away”
In conclusion, there’s no need to “sell in May and go away” when you can consider increasing your dividend income with ETFs like JEPI and EWZ during this time.
JEPI is probably the more stable, defensive name and one that investors can “set it and forget it” while receiving a monthly payout, while EWZ is probably a bit more suited to risk-tolerant investors but also offers more potential upside from capital appreciation in addition to its own massive dividend yield.
While these are very different types of ETFs, I view both as strong choices for investors who want to jumpstart their own dividend portfolios or boost the passive income of their existing portfolios.
