The Ultimate High-Yield Dividend ETF to Buy With $500 Right Now

In 2022 and 2023, rising interest rates drove many income investors from dividend stocks toward low-risk CDs, T-bills, and bonds. That trend caused many dividend-paying stocks and exchange-traded funds (ETFs) to lose their luster.

However, the Federal Reserve cut its benchmark rates three times in 2024 and is planning for at least two more rate cuts in 2025. If that happens, more income investors should gradually rotate back toward higher-yielding dividend stocks and ETFs.

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But that rotation won't happen overnight. With the 10-year Treasury yield still hovering near 4.8%, a lot of fixed-income investments are still paying richer yields than most dividend stocks. So, instead of aggressively scooping up individual dividend stocks right now, it might be smarter to buy a diversified, income-oriented ETF that uses covered calls to boost its yield.

If that strategy sounds interesting, then you should take a closer look at the JPMorgan Nasdaq Equity Premium Income ETF (NASDAQ: JEPQ). A small $500 investment in that ETF will give you nearly $50 in extra income every year.

How do covered call ETFs work?

A covered call is a call option that an investor writes on a stock they already own. By selling a call on the stock, the investor earns a premium, while the buyer gets the option to buy the underlying stock at the strike price on the expiration date. If the stock doesn't reach the strike price by then, the investor pockets the premium and keeps the stock. But if the stock exceeds the strike price, the investor must sell it to the call holder at the strike price.

For example, an investor who bought 100 shares of Apple at $100 would be willing to sell those shares at $250. Apple's stock is trading at $230 as of this writing, so the investor could sell a single covered call with a strike price of $250 and an expiration date of Jan. 31. That option is worth $0.94 right now, so a single contract (tethered to 100 shares) would net a premium of $94.00 (excluding any commissions and fees). If Apple is still trading below $250 by Jan. 31, the option expires, and the investor keeps the $94. But if it jumps to $260, the investor must sell the stock at $250.

This strategy works well in a stagnant market that is trading sideways, but it limits your gains in a bull market because your rising stocks will eventually be called away. However, many investors still consistently use this strategy to boost their income.

Constantly selling covered calls on all your positions can be a messy and time-consuming process, so many financial institutions now offer ETFs that automatically sell covered calls on diversified baskets of stocks to generate consistent income. That gives them much higher yields than traditional dividend-oriented ETFs.

Source: YCharts

Why is the JPMorgan Nasdaq Equity Premium Income ETF a good buy?

The JPMorgan Nasdaq Equity Premium Income ETF holds 103 stocks that closely mirror the Nasdaq-100 index. It writes covered calls on the Nasdaq-100 each month, it pays its distributions monthly, and it currently has a 30-day SEC yield of 9.76%. It charges a low expense ratio of 0.35%.

Instead of directly writing covered calls, it uses equity-linked notes (ELNs) that are tethered to covered calls. That extra layer makes them more tax-efficient than raw covered calls, which are subject to short-term capital gains taxes with every trade.

The ETF's investments in the Nasdaq-100 make it a well-diversified investment on its own, and its top holdings include Apple, Nvidia, Microsoft, and Amazon. As of this writing, it trades at $55.50 -- which is lower than its latest net asset value (NAV) of $55.95. That means you're getting all of the underlying stocks at a slight discount to their market prices.

The ETF pays such a high yield because covered calls on more volatile stocks net higher premiums than more predictable ones, and some of the Nasdaq-100 stocks went through some wild swings over the past few years. But it offsets that volatility with its diversification, and it focuses on generating consistent monthly distributions instead of writing the priciest covered calls.

Those qualities make the JPMorgan Nasdaq Equity Premium Income ETF a dependable way to earn a near-10% yield in this wobbly market. It might not be the best play for growth-oriented investors, but it's a great way to earn some extra income as the market trades sideways and churns out predictable premiums for covered call ETFs.

Should you invest $1,000 in JPMorgan Nasdaq Equity Premium Income ETF right now?

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Leo Sun has positions in Amazon, Apple, and JPMorgan Nasdaq Equity Premium Income ETF. The Motley Fool has positions in and recommends Amazon, Apple, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.