The Best High Yield Dividend ETF to Invest $2,000 in Right Now

High yield funds can be risky. In a perfect world, all extremely generous dividend yields would be a direct result of strong businesses generating high excess cash profits. In the real world, they are often associated with low stock prices and businesses in deep financial trouble. As a result, high yields tend to be paired with disappointing price charts and modest total returns, at best.

What if I told you that one of the largest income-oriented exchange-traded funds (ETFs) on the market today combines a rich yield with impressive fund-price returns? The JPMorgan Nasdaq Equity Premium Income ETF (NASDAQ: JEPQ) checks both of those shareholder-friendly boxes – and a whole lot more.

The Premium Income ETF is a very young fund, launched in May 2022. You may also have missed it in the huge sea of income producing ETFs because it is an actively managed fund. Passive index funds tend to come with lower annual fees, so it makes sense to start your fund screening process with that criterion.

But this JPMorgan the instrument may be worth its 0.35% management fee. Here's a quick summary of the fund's unique qualities:

Premium Income ETF's experienced management team relies on data science to select high income stocks from growth oriented stocks. Nasdaq 100 market index.
54% of the portfolio is currently invested in information and communications technology services – two market sectors closely linked to the ongoing boom in artificial intelligence (AI).
The top 10 holdings include the entire list of “Magnificent 7” stocks. – proven winners with very large market caps.
Some of those tech giants don't pay dividends, but fund managers generate monthly income from them in other ways.
The annual dividend yield is currently 9.3% after rising above 12% over the summer.
It has a whopping $20.7 billion of assets under management, despite its short market history. Investors were quick to embrace this promising new fund:

JEPQ Total Assets under Control Chart — JEPQ Total Assets Under Management data from YCharts.

The dividend boosting methods include some dangerous tricks, such as selling short-term call options to generate payouts out of volatile stocks. That's great when it works, but it could also lead to poor fund performance a lower yields in a continuing market downturn.
The fund was launched a few months earlier this bull market start It has yet to be tested in a weak economy, which could unleash the downsides of option-based investment tactics.
The management fee of 0.35% may not seem like much, but it is much higher than the 0.06% average of today's 10 largest ETFs and even further ahead for low-cost funds such as Vanguard S&P 500 ETF (NYSEMKT: FLIGHT). The fee could make a big difference in the long run. The Vanguard fund's 0.03% annual fee adds up to 0.3% in a decade, while Premium Income ETF fees would total 3.6% over the same period.

The option-based income results in a monthly dividend payment instead of the usual quarterly checks. You can call that an advantage or a disadvantage, depending on which payment cadence you prefer.

The Premium Income ETF's total return has matched broad market trackers such as the Vanguard S&P 500 ETF since its inception in 2022. At the same time, the fund's price has only increased by 28%, while the market tracker has risen by 46% . In other words, the fund remains reasonably priced, even in a rare market surge, and you're still locking in some amazing dividend payments over the long term.

The monthly payments added up to $5.38 per share over the past year, or a yield of 10.7% against a current share price of around $58. I can't promise that the fund will boost its payouts forever, given its reliance on unconventional option-based techniques, but it might be useful to consider how small increases in payouts might pan out over time .

We imagine that the fund's total annual return hovers around the 10% mark over the next decade — a fairly reasonable assumption for a fund that tends to match S&P 500. We will assume that the dividend payments increase at a similar rate, resulting in an increase of 159% over the next decade.

You would then have a current return of 9.3%, but the same payment represents a return of 24% against the original purchase price. If you are looking for strong dividend payments 20 years down the line, this fund could give an effective return of 62% on an investment made in 2024.

This thought experiment relies on a lot of assumptions, but you get the idea. Even if the JPMorgan Nasdaq Equity Premium Income ETF could underperform the S&P 500, it could grow into a hyper-effective source of cash payouts over the long term. If you have $2,000 available to start a position today, this fund could pay dividends approaching $1,317 in 2044. That's an effective yield of 66%, although it could be higher or lower depending on how correct are my assumptions.

At that point, the price per share will no longer matter. You would never sell any part of that high powered cash machine unless you had to.

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JPMorgan Chase is an advertising partner of Motley Fool Money. Anders Bylund He has positions in Vanguard S&P 500 ETF. The Motley Fool has positions and recommends JPMorgan Chase and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.

The Best High Yield Dividend ETF to Invest $2,000 in Right Now originally published by The Motley Fool

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