How JEPQ offers over 10% of dividend yield

JEPQ operates a covered call strategy on about 20% of its portfolio, similar to its sibling fund, JEPI. Both ETFs use equity-linked notes (ELNs) to simulate the income typically generated from a covered call approach. These short-dated calls, usually expiring within a month, help generate income while minimizing volatility. JEPQ tends to focus on tech-heavy stocks from the Nasdaq-100, offering investors potential for both high dividend income and growth, although this concentrated tech exposure comes with higher risk.

JEPQ’s ability to generate an annual yield of around 10% through monthly dividends is largely due to its covered call strategy on approximately 20% of its portfolio, along with the dividend income from the stocks it holds. The covered call options generate premiums that contribute to the overall yield. This strategy works well in a flat or moderately volatile market, as it allows the fund to collect income from the call options. However, this approach also caps some of the upside potential of the portfolio if the underlying stocks experience significant growth.

In essence, the combination of options premium (from selling covered calls) and dividends from high-growth tech stocks helps JEPQ achieve its high yield. However, the 20% covered call strategy is a key component in maintaining a steady income stream even in volatile markets.