-
SCHD prioritizes quality over yield. Its strong dividend screens and tax-efficient payouts make it popular, but the 3.45% yield may be too low for income-focused investors.
-
Options-based ETFs can generate much higher income. Funds like JEPQ and SPYI convert market volatility into monthly payouts exceeding 10%.
-
Higher yield comes with trade-offs. These strategies often sacrifice some upside and may have less tax-efficient distributions than traditional dividend ETFs.
-
A recent study identified one single habit that doubled Americans’ retirement savings and moved retirement from dream, to reality. Read more here.
There are many things the Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD) does very well.
Read: Data Shows One Habit Doubles American’s Savings And Boosts Retirement
Most Americans drastically underestimate how much they need to retire and overestimate how prepared they are. But data shows that people with one habit have more than double the savings of those who don’t.
For starters, it is extremely affordable with a 0.06% expense ratio. Its distributions are also relatively tax efficient because the fund excludes real estate investment trusts (REITs), meaning most of the payouts come in the form of qualified dividends.
I also like the underlying methodology. SCHD tracks the Dow Jones U.S. Dividend 100 Index, which uses a fairly rigorous screening process. Companies must have at least 10 consecutive years of dividend payments, and they are evaluated on several additional fundamentals including free cash flow to total debt, return on equity, dividend yield, and five-year dividend growth.
Those quality screens are a big reason why SCHD has become one of the most popular dividend ETFs on the market, with about $83.7 billion in assets under management. But despite all of those strengths, SCHD is not the right tool for every income investor.
For people who prioritize yield above all else, the ETF’s current 30-day SEC yield of about 3.45% may feel underwhelming. Investors who rely on their portfolios for income often look for much higher payouts.
At that point, many people make the mistake of chasing the latest high-yield product, particularly synthetic single-stock options income ETFs that advertise eye-catching double-digit distribution rates. The problem is that many of those strategies deliver very weak total returns compared with simply holding the underlying stock.
Fortunately, there are better options. If your goal is income first, it is possible to find diversified ETFs that generate annual yields of 10% or more while still maintaining a more balanced structure. Here are twp income-focused ETFs I like that currently offer 10%+ yields and pay investors every month.
The 100 largest non-financial companies that make up the Nasdaq 100 index are not exactly known for paying high dividends. Many of these firms operate in the technology sector or adjacent industries and prefer to reinvest their substantial free cash flow into research and development, particularly in areas such as artificial intelligence (AI).
However, ETFs can use a bit of financial engineering to transform the volatility of these stocks into a steady income stream. One standout example is the JPMorgan Nasdaq Equity Premium Income ETF (NASDAQ:JEPQ).
JEPQ’s strategy has two main components. The first is a portfolio of actively selected Nasdaq 100 stocks. While the ETF generally follows the composition of the index, the managers have flexibility to hold additional companies outside the benchmark. The goal is to capture much of the Nasdaq 100’s return while maintaining somewhat lower volatility.
The second component is where the income comes from. A portion of the portfolio is invested in structured products known as equity-linked notes, or ELNs. These are debt instruments issued by financial institutions that embed the payoff structure of an out-of-the-money covered call strategy on the Nasdaq 100 index.
As a general rule, covered call strategies tend to generate higher income when the underlying assets are more volatile. Investors selling options are effectively being compensated for the uncertainty and price swings of those stocks. Because Nasdaq stocks tend to exhibit higher volatility than many other sectors, that option premium can be substantial.
As of March 13, JEPQ’s forward distribution yield, calculated using the most recent monthly payout relative to the ETF’s net asset value, sits at about 10.46%. The ETF has also delivered strong total returns historically. Over the trailing three-year period through February 2026, JEPQ has produced an annualized return of about 23.24% with distributions reinvested.
There is one important caveat. Because the income is generated through ELNs, much of the distribution is taxed as ordinary income rather than qualified dividends. That makes the strategy less tax efficient in taxable accounts. Even so, JEPQ remains relatively cost-effective for an options-based income strategy, charging a 0.35% expense ratio.
Some investors may find the Nasdaq 100 and strategies built around it, such as JEPQ, a bit too concentrated. The concern is not only that the index is dominated by its 10 largest holdings, but also that it carries a heavy technology sector tilt. A small group of companies accounts for a significant portion of the index, which can make the overall portfolio less balanced.
If broader diversification is your priority, an alternative is the NEOS S&P 500 High Income ETF (BATS:SPYI). Instead of focusing on the Nasdaq 100, SPYI is benchmarked to the S&P 500 index. That immediately spreads exposure across a wider set of industries and reduces the technology concentration seen in many Nasdaq-based strategies.
SPYI then layers an index options strategy on top of that equity exposure. Unlike JEPQ, the fund does not rely on ELN. Instead, it sells options directly on the S&P 500 index itself. This distinction matters for tax purposes.
Options written on the S&P 500 index, which trade under the ticker SPX, are classified as Section 1256 contracts. These contracts receive blended tax treatment, where 60% of gains are taxed at long-term capital gains rates and 40% at short-term rates, regardless of the holding period. That structure can be more favorable than strategies where income is taxed entirely as ordinary income.
Another difference is how the options strategy is managed. While SPYI’s underlying stock exposure largely mirrors the S&P 500, the options component is actively managed. The managers can sell options to generate premium income and occasionally purchase options to preserve more upside participation.
So far, the results have been solid. Over the trailing three-year period through February 28, 2026, SPYI delivered a 17.21% annualized return. That compares favorably with the CBOE S&P 500 BuyWrite Monthly Index, which returned 12.81% over the same period.
The ETF currently pays a distribution rate of about 12.04%. The tax treatment of those distributions can also be attractive. According to NEOS, an estimated 98% of the most recent distribution was classified as return of capital. Return of capital is not immediately taxable but instead reduces an investor’s adjusted cost basis.
The main drawback compared with JEPQ is cost. SPYI carries an expense ratio of 0.68%, which is almost twice as high as JEPQ’s 0.35%.
Using the ETF backtesting tool from testfolio.io, I compared all three ETFs on a total return basis, meaning distributions were reinvested and taxes were not considered.
The backtest covers a roughly 3.5-year period from August 30, 2022 to March 12, 2026. Here is how a $200,000 lump sum investment in each ETF would have performed.
-
Starting with SCHD, the investment would have grown to $288,502.82. That represents a cumulative return of 44.25%, or an annualized return of 10.93%.
-
For JEPQ, a $200,000 investment would have grown to $364,509.96, producing a cumulative return of 82.25% and an annualized return of 18.52%.
-
SPYI landed between the two. The same investment would have reached $315,780.93, generating a cumulative return of 57.89% and an annualized return of 13.81%.
It is important to note that these results should not be extrapolated as a prediction of future performance. The time period covered in this test happened to favor certain sectors and strategies.
SCHD’s dividend-focused portfolio lagged during much of this window largely due to its sector positioning. While the fund has received some support recently from its overweight exposure to energy companies, which have performed well amid geopolitical tensions involving Iran, the broader growth environment benefited other strategies.
JEPQ and SPYI both had greater exposure to growth-oriented sectors, and JEPQ in particular benefited from its heavier technology concentration. That helped offset the upside limitations created by their covered call strategies.
Again, these results assume all distributions were reinvested and taxes were ignored. If an investor had withdrawn part of those distributions to fund spending, or paid taxes on them in a taxable account, the outcomes could look different. That is why it is always important to consider both the type of account you hold these ETFs in and your personal tax situation.
Most Americans drastically underestimate how much they need to retire and overestimate how prepared they are. But data shows that people with one habit have more than double the savings of those who don’t.
And no, it’s got nothing to do with increasing your income, savings, clipping coupons, or even cutting back on your lifestyle. It’s much more straightforward (and powerful) than any of that. Frankly, it’s shocking more people don’t adopt the habit given how easy it is.