An Inside Look at Dividend Investing

Amidst the diverse array of investment strategies, dividend investing emerges as a stalwart and time-honored method, blending a steady income stream from dividends with the potential for prolonged growth from the underlying holdings.

Amidst the ever-shifting landscape of investments, dividend investing has proven to be a bastion of stability, offering a reliable means of bolstering our portfolios while affording a shield against the tumultuous market forces. Furthermore, dividend investing has carved a niche as a low-volatility strategy, serving as a steadfast avenue for securing enduring income over the span of numerous years.

In this feature, we set out to dissect two quintessential Exchange Traded Funds (ETFs) tailored for dividend and income investors— the JPMorgan Equity Premium Income ETF (NYSEARCA:JEPI) and the Schwab U.S. Dividend Equity ETF (SCHD). Each ETF is uniquely structured, yet both share the common objective of dispensing recurrent distributable income while maintaining lower volatility than the broader equity market.

While some argue that SCHD and JEPI are not directly analogous, they undeniably reign as two of the prevailing instruments for accruing periodic income.

Although these two ETFs endeavor to deliver stable periodic returns with minimal volatility, their performance has not consistently surpassed that of (SPY) over a three-year period. There were fleeting instances of these ETFs outperforming SPY, such as in October 2022, but their glory was short-lived, as they were promptly overtaken in the subsequent 12 months.

Still, as we shall soon uncover, an array of compelling reasons exists for integrating an ETF into one’s investment portfolio.

In addition, we intend to probe into the construction of each of these two ETFs. This exploration is bound to lead us into an analysis of the strategies underpinning JPMorgan (JPM) and Schwab (SCHW) in regard to their respective ETFs, as well as a scrutiny of the performance of these ETFs.

What Makes ETFs Tick?

Emulating the Magnificent 7, Nvidia (NVDA) soared by nearly 250% in the previous year. As evidenced in the chart below from our ‘X’ piece, where we delved into the leading gainers of 2023, even the poorest performer amongst the Magnificent 7, Apple (AAPL), still yielded a return exceeding 54.05%!

One might ponder – should I simply invest in Microsoft (MSFT), Tesla (TSLA), Alphabet (GOOGL)(GOOG), Amazon (AMZN), Meta (META)…? There are undoubtedly compelling arguments in favor of such a move. In the subsequent sections, we aim to elucidate the advantages of immersing oneself in a dividend ETF, and when it comes to the deliberation between SCHD and JEPI, one clearly emerges as the prime choice!

One might ponder – why invest in an ETF? If seeking a low-risk investment entailing a diverse array of stocks or other securities for heightened diversification, ETFs emerge as a compelling option. They are generally deemed cost-effective and boast markedly lower expense ratios than actively managed funds characteristic of hedge funds or mutual funds. Moreover, ETFs offer the prospect of instantly reinvesting dividends – an enticing prospect, isn’t it?

ETFs afford exposure to an array of stocks within a specific industry, security, country, or broad market index. Essentially, these vehicles encapsulate a myriad of securities in a singular product, facilitating swift diversification of one’s portfolio. ETFs can also encompass asset classes beyond equities, including bonds, currencies, and commodities.

This ease of diversification does come with a nominal annual fee, known as the expense ratio, which can range from moderately substantial to virtually negligible. For JEPI and SCHD, the expense ratios stand at 0.35% and 0.06%, respectively.

By way of comparison, popular ETFs such as ARK Innovation ETF (ARKK) or the YieldMax TSLA Option Income ETF (TSLY) sport expense ratios of 0.75% and 0.99%, correspondingly. Hence, the expense ratio for SCHD and JEPI resides within the realm of insignificance.

One could indeed painstakingly construct a portfolio mirroring JEPI or SCHD, but for many, the time and effort requisite for managing such an endeavor might prove too taxing.

Beyond endowing you with diversification, ETFs differ notably in their management. For instance, JEPI endeavors to generate income via the sale of covered calls on its stock holdings. Covered calls signify a widely employed options strategy that empowers the seller (in this instance, JP-Morgan) to amass a premium on the options they vend. Conversely, SCHD fixates on higher-yielding companies and adopts a far more passive approach to amassing dividends. Furthermore, SCHD strives to replicate the Dow Jones US Dividend 100 Index (DJUSDIV).

Evidently, as we shall soon unfold, while we might harbor a preference for one ETF over the other, both JEPI and SCHD yield exposure to an array of sectors.

Penetrating the Essentials

It is imperative to comprehend the essence of the investment you’re making when selecting between JEPI and SCHD (or conceivably, opting for both). JEPI administers around $30.6B in assets, while SCHD takes charge of $51.7B at the moment of this composition, and their holdings diverge significantly.

Outlined below is a table delineating the top 10 holdings of JEPI and SCHD and the proportion each contributes to the overall portfolio.

SCHD adopts a more concentrated approach, with its top 10 holdings accounting for over 40% of the ETF’s aggregate. Contrarily, JEPI takes a less concentrated stance, with its top 10 holdings constituting just over 16% of its assets under management.

Furthermore, the types of stocks held by the two ETFs are notably distinct. Astute investors may discern that SCHD holds