ETFs
Worried about a stock market correction with the S&P 500 and Nasdaq Composite at record highs? 2 ETFs and 1 Dividend King to buy now
You don’t have to buy growth stocks to succeed in the stock market.
Since the beginning of 2023, the Nasdaq Composite increased by 62%, and the S&P500 is up 38%. This has been a nice move, but some investors may be concerned that the market is on the verge of a sell-off.
Although it is never a good idea to revise your investment strategy based on speculative intuition, there are safer and exchange traded funds (ETF) which can limit downside risk. Here is why the JPMorgan Equity Premium Income ETF (JEPI 1.00%), the JPMorgan Nasdaq Equity Premium Income ETF (JEPQ 0.20%), and Walmart (WMT 1.34%) are great buys now.
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Two actively managed funds with clear objectives
The JPMorgan Equity Premium Income ETF is an actively managed fund that invests in the S&P 500 and generates income through equity-linked notes (ELNs) and covered calls. The JPMorgan Nasdaq Equity Premium Income ETF does the same thing but uses the Nasdaq-100 as a benchmark instead of the S&P 500. Nasdaq-100 is one of the 100 largest non-financial companies on the Nasdaq Composite.
ELNs combine bonds and stock options to generate income and benefit from potential rising stock prices. These are essentially alternatives to low-yielding, fixed-income products, with higher upside potential, but also the possibility of a lower return if the options expire worthless.
Covered calls can be sold for equity to generate income. In exchange for receiving a premium, the seller of the call caps his upside potential.
Let’s use Microsoft (NASDAQ: MSFT) as an example. Microsoft’s stock price is around $430 per share. Let’s say you want to sell a $450 covered call for August 2024. As of this writing, this option costs around $10.70. The buyer pays you $10.70 per share upfront in exchange for the option to buy the stock at $450 at any time between now and expiration, which is August 16, 2024. The premium of 10, $70 divided by the stock price of $430 is essentially a guarantee of 2.5. % yield in a few months.
The covered call option will generate a higher return than holding the stock, unless Microsoft exceeds the strike price ($450) plus the call premium ($10.70), or 460 $.70. At this point, it would have been better to just own the shares rather than the shares plus the covered call.
A covered call strategy will be more effective than holding the stock if the stock price increases slightly, stays the same, or declines. A good example is 2022. The S&P 500 produced a total return of negative 18.1%, but the JPMorgan Equity Premium Income ETF produced a total return of only negative 3.5%, as call premiums and ELN income helped offset equity losses.
However, since the start of 2023, simply investing in the S&P 500 or Nasdaq-100 without covered calls would have been a better strategy.
Recently, mega-cap growth dominated broader indices to new heights. If a fund sold covered calls on hot stocks like Nvidia Or Metaplatformshe would have missed out on monster winnings.
Still, these two JPMorgan ETFs could be a good choice for investors who want to continue investing their capital in the market, but who also want guaranteed passive income and some protection against downside risk.
Returns vary depending on the contracts entered into by the actively managed fund. But the running yield of the Equity Premium Income ETF is 7.6%, and the running yield of the Nasdaq Equity Premium Income ETF is 9.3%. Call premiums tend to be higher on growth stocks because of the upside potential, which is why the growth-oriented Nasdaq product has a higher yield than the S&P 500 product.
Another added benefit is that income is distributed monthly, unlike a quarterly dividend, making ETFs frequent and important sources of passive income. Both funds have expense ratios of just 0.35%, which is an excellent price for an actively managed and rather complex product.
A dividend king with room to maneuver
If the ETF route isn’t for you or you’d rather not cap your upside potential, then investing in rock-solid dividend stocks is another great option to consider. Walmart is a dividend king that has increased its payouts for 51 consecutive years. Its yield is just 1.3%, but there’s reason to believe Walmart could make larger dividend increases in the future.
In fiscal 2025, Walmart expects increase adjusted earnings per share (EPS) of at least 4% and net sales of at least 6%. Despite the pandemic and supply chain challenges, Walmart grew its sales by 26.9% over the past five years and diluted its EPS by 57.9%.
Walmart has made significant investments in recent years. Its capital spending over the past 12 months now exceeds $20 billion, nearly double pre-pandemic levels.
WMT Capital Expenditures (TTM) data by Y Charts
Walmart has expanded its product offering to better align with consumer preferences and create value for its customers. It has carried out extensive store renovations and built new stores as part of its Store of the Future concept. In January, Walmart announced plans to renovate 650 stores over the next 12 months. During its recent first-quarter fiscal 2025 earnings conference call, the company said it is now on track to complete 900 renovations this year.
Walmart has invested in curbside pickup, Walmart+ and Walmart + InHome. These out-of-store options are Walmart’s way of offering convenience for customers and increase its e-commerce offering to better compete with other retailers (including Amazon).
These investments have come at a high cost, but the long-term benefits have yet to be reflected in Walmart’s profits, suggesting that profit growth and dividend increases may accelerate from here on out. And with a payout ratio of just 33%, Walmart has plenty of room to increase its dividend.
Get creative with ETFs and dividend stocks
Regularly contributing new savings to your stock portfolio and investing, regardless of what the market is doing, is a great way to accumulate wealth over time. These two call-focused hedged funds generate more passive income than many high-yielding dividend stocks and could outperform broader benchmarks if the market cools.
However, long-term investors might prefer an industry-leading dividend king like Walmart. Even though its performance is lower, the company has a clear path to growing profits over time.
Perhaps the best approach is to combine ETFs and dividend stocks to increase passive income and achieve diversification. Today’s era of low-cost funds and low or no trading fees on most brokerage accounts allows investors to get creative and build a portfolio that suits their risk tolerance and interests, and helps them achieve their financial goals.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool holds positions and recommends Amazon, Meta Platforms, Microsoft, Nvidia and Walmart. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Mad Motley has a disclosure policy.