With that, I want to dive in to a relatively new fund I’ve invested in, the TSPY ETF from TappAlpha. The fund and the fund manager are both very new to this game so it should be interesting to see how TSPY performs moving forward.

Also, for those interested, I recently watched an interview with the TappAlpha founder and they have some new ETF’s on the horizon. Stay tuned to TappAlpha.com for more on that, I know I was interested in a few he mentioned. If you want to watch that interview here it is on Youtube.com. Lastly, if you want to see how it’s performed for me, find it here in my Unqualified Portfolio.

Post Agenda

• TSPY ETF Overview
• Key Statistics
• TSPY Investment Strategy
• Fund Holdings
• Performance & Yield
• Tax Considerations & Dividends
• Potential Benefits
• Potential Risks
• Key Considerations for Investors

TSPY ETF Overview

The TappAlpha SPY Growth & Daily Income ETF (TSPY) is a new ETF launched in August of 2024. They’re chief aim with the fund is to provide investors with current income while maintaining the prospect of capital appreciation. TSPY is listed on the Nasdaq exchange and is invested in large-cap equities through its SPY holding. The fund has assets under management (AUM) as of today totaling $13.57 million, which is relatively small compared to similar ETF’s.

Key Statistics

As we uncover the TSPY ETF in the sections ahead we’ll have a greater understanding of the fund and how it may perform. However, for now, I thought it would be important to offer some of the most important statistics first for anyone just needing the basics to know if the ETF is for them. If it is, then you’ll be able to follow along below. If it isn’t for you, then you won’t have to venture to far into this post.

• Expense Ratio – 0.68%
• Current Dividend Yield – 13.89%
• Dividends Paid (ttm) – $3.52
• Most Recent Ex-dividend date – January 8, 2025
• 52-Week Price Range – $23.98 – $26.96
• Current Price – $25.39
• Inception Date – August 14, 2024

TSPY Investment Strategy

First, for those wanting to hear the strategy straight from the camel’s mouth, check out this interview with TappAlpha’s founder Si Katara on the Wealth Adventures Youtube channel. That video will provide at least the ability to form an opinion about the funds potential.

The TSPY ETF has a primary objective that is two sided. They first want exposure to the S&P 500 through the SPY ETF. SPY is the largest and most liquid ETF in the world, at least to my knowledge. TSPY’s second objective is daily covered call options for income generation.

TSPY uses what they call “fintech” or proprietary financial technology to constantly evaluate various risk factors and performance. This fintech is designed to provide investors with stable income, capital appreciation, and risk mitigation techniques to improve returns.

Here are the key points to note about the TSPY ETF and their investment strategy.

• Hold SPY ETF shares
• Write OTM 0 Day’s to Expiration (DTE) call options
• Fintech identifies optimal strike prices
• Fintech monitors and evaluates volatility and risk factors
• Potential for TSPY to outperform SPY
• TSPY maximizes time decay through 0 DTE call options

Fund Holdings

TSPY is almost entirely concentrated into the SPY ETF, with 99.5% of it’s assets housed there. Thus, TSPY is just a wrapper around SPY with the daily options strategy included for income. If you’re seeking exposure to another sector or market entirely then the TSPY ETF wouldn’t suit your investment target.

However, if you’re seeking broad market exposure to the top 500 U.S. companies but want to mitigate some downside risk with income then the TSPY ETF may fit the requirement. In all, TSPY is solely focused on the SPY ETF and income generation through options. Thus, return characteristics for the TSPY ETF will follow the volatility and performance of the SPY ETF itself.

TSPY ETF Performance & Yield

As a new fund, TSPY does not have much of a historical track record. Meaning, it’s impossible as I write this to know how the fund will respond during a bear market. Since TSPY’s inception the market has been mostly bullish with SPY returning approximately 8.5% during that period. For comparison, TSPY has returned about 4.5% not including the dividend yield. If you include the current income return of about 4% then TSPY is almost directly in line with SPY on a total return basis.

TSPY has a stated objective of returning about 12 – 14% in income to investors. If they’re able to achieve that target consistently and the above performance continues it would be possible for TSPY to outperform the total return of the SPY shares it holds. For instance, if SPY returned 12% in 2025 and TSPY returned half of that at 6% but also included a 12% dividend, then TSPY would have returned a total of 18% to SPY’s 12%.

This may be wishful thinking given the nature of capping upside with the daily covered call approach but based on the information today, it’s entirely possible. Much of that possibility however rests on the the financial technology TappAlpha boasts and where strikes are placed on each daily call option.

Tax Considerations & Dividends

First, it’s always important to speak with a qualified tax professional to verify claims about TSPY or any fund because I’m not a tax professional.

That said, distributions from TSPY could be treated as either qualified or non-qualified dividends. To be eligible for qualified dividend tax rates an investor must hold TSPY for at least 61 days during the 121-day period beginning 60 days before the ex-dividend date. In short, to achieve favorable tax treatment avoid trading in and out of the fund.

Non-qualified dividends or ordinary dividends are generally taxed at the standard income tax rate. Achieving qualified dividend status would tax the income from TSPY at the lesser capital gains rate. Non-qualified dividends are taxed up to 37% depending on an investors tax bracket and the tax on qualified dividends is capped at 20%.

Potential Benefits for TSPY

• Income generation – A target dividend yield of 12 – 14%
• S&P 500 Exposure
• Capital Appreciation
• Liquidity – TSPY is new and liquidity is very light but the underlying holdings in SPY remain highly liquid

Potential Risk Factors for TSPY

• Limited track record as a new fund
• Higher expense ratio at 0.68%
• Concentration risk with most of TSPY held in SPY
• General market risk
• Income variability – yield targets are attractive but may fall during periods of low volatility

Key Considerations for TSPY Investment

To make an informed decision about the potential for an investment in the TSPY ETF an investor must carefully consider their own intended target. Are they wanting market returns at minimum, do they need income today, or are they looking for some mix of both. These are just a few of the possible questions we’ll have to ask prior to an investment into TSPY or any other income focused product. For me, I like receiving the dividends even if I accumulate a lesser total return. It helps me stay focused and provides the psychological benefit of seeing the income deposited to my account. Silly I know but it’s a valuable component for me.

Still, here are some items to consider before committing capital to TSPY.

• Investment Goals – is there a need for TSPY within the portfolio?
• Portfolio fit – does TSPY complement or detract from the portfolio’s design?
• Cost analysis – is the higher expense ratio to high or could a similar return be achieved elsewhere for a lesser cost?
• Tax consequences – every dividend, qualified or non-qualified has a tax implication.
• Long-term or short-term – What is my time horizon?
• Regular monitoring is always important with funds such as TSPY because their strategy may change at any time in an attempt to adapt to changing market conditions.

Final Thoughts

Well, I think I covered everything above but in summation, like other income focused funds, I think TSPY would depend on what you’re after. If you want a higher income and like the idea of generating that income daily then TSPY may fit the bill. Personally, I like the daily options approach because it doesn’t give SPY as much time to climb above the short call compared to monthly calls. However, on large up days TSPY would be at a disadvantage as they attempt to maintain their target income rate. In that instance, monthly calls would become more attractive since they could be sold further from the current market price.

In total, daily income is a preferred strategy for me. I like knowing that I’m not tied to a longer dated option and I can reset my short call regularly. Doing this means I may miss one large upside day but I won’t miss every day’s upside. Whereas monthly calls by comparison could potentially limit upside exposure until the short call is exercised and a new higher call is set.

Until the next post.

God bless,

Jeff

<p>The post TSPY ETF Explained: Balance Income & Performance first appeared on UQinvest.com.</p>

With that, I wanted to take a closer look at an ETF I’ve had a great experience with in the year I’ve owned it. I haven’t seen the growth potential I’d hoped but the higher income has more than sufficed while I wait for QQQ or JEPQ in this case, to continue making new highs.

If you’re interested to learn more directly from JPMorgan’s Website, have a look here for the prospectus, summary prospectus, and several other relevant fund metrics. If you want to see how JEPQ is behaving in my own portfolio, have a look at the Unqualified Portfolio here.

Post Agenda

• Overview
• Investment Strategy
• Expenses
• JEPQ ETF Pros & Cons
• JEPQ Investment Returns
• 3-Year Performance Data

JEPQ Overview

The JPMorgan Equity Premium Income ETF or JEPQ is an actively traded fund and invests in large-cap companies from the Nasdaq 100 index. JEPQ uses a covered call strategy to generate a higher level of income at almost 10% per year, making it very attractive for income seeking investors. Currently, the fund has approximately $21 billion in assets under management with an expense ratio at a reasonable 0.35% given the funds potential.

JEPQ Investment Strategy

JPMorgan uses a popular options strategy combining equity investments with an out of the money covered call. This approach accomplishes the goal of generating an additional income without completely ignoring capital appreciation. Short calls are entered above the current market price but at that point upside appreciation is forfeited in return for the income that is received.

I do prefer this strategy to other funds that chose to sell at the money calls. Those funds may return a higher premium but do so at the expense of any capital appreciation. I just don’t care for a fund that participates in all of the downside and none of the upside.

In any case, JEPQ uses a more conservative options approach and has performed quite well in my opinion. We’ll take a closer look in another section but in the few days of 2025, JEPQ is trading in lockstep with QQQM, the Nasdaq 100 ETF.

Expense Ratio

As mentioned previously, the JEPQ ETF has a respectable expense ratio of 0.35%. For comparison, the SPY ETF has an expense ratio of 0.09% so yes JEPQ is higher but not egregiously so. Making the expense ratio more than competitive for an actively traded fund. SPY maintains a lower expense ratio primarily because of it’s “hands-off” or “passive” approach.

There are no loading fees to speak of and like most ETF’s, no other hidden fees. Every cost is wrapped into that 0.35% expense ratio and at $35 for every $10k invested, it’s more than manageable. It’s likely, we couldn’t replicate JEPQ’s performance for any less in fees if we wanted to go about structuring a similar strategy.

JEPQ ETF Key Benefits

• Well above average dividend yield at approximately 9.7%
• Lower volatility compared to the Nasdaq-100 Index
• Diversified investment into Large-Cap Technology stocks

JEPQ ETF Key Detractors

• Capped upside due to the covered call strategy
• Higher concentration risk to Technology stocks
• Additional complexity from the options strategy

JEPQ ETF Investment Returns

Since inception JEPQ has been providing investors with a great return, including appreciation of about 12% in the past year. Additionally, as of today, JEPQ has captured about 75% of the Nasdaq-100’s upside while simultaneously generating a consistent stream of income. This combination of growth and income has attracted plenty of investors to JEPQ at this relatively early stage and will likely be a deciding factor for many other investors in the years to come.

3 Year Performance Results

Back Test Criteria:

• $5,000 Initial Investment
• $100 Monthly Contribution
• Start Date – 1/14/22

Assuming a $5,000 initial investment and $100 monthly contributions starting January 14^th, 2022 an investment into JEPQ would have become approximately $17,000 throughout the period. The total capital contribution across the 36 month period would be $8,600 for a total return of $8,400 or almost 100% in total return.

Doubling an investment in just a little under 3 years is no easy task. JEPQ has become a star performer within the options ETF space and should these metrics continue, will be well into the future also.

Final Thoughts

JPMorgan has found a winning formula with their JEPQ ETF. By combining the ability to capture upside JEPQ separates itself from other high yielding funds. Many of which not only fail to grow but actually have a decaying share price as a byproduct of their particular strategies. Not exactly a recipe for longer term success.

Still, as it is with any investment, there are good performers and not so good performers. In my opinion JEPQ falls into the better performers camp having virtually doubled an investment over the past 3 years.

At a reasonable expense ratio, approximately 75% of the Nasdaq’s growth potential, and about a 10% yield, JEPQ offers plenty for investors to like. Add to that any yield increases that may result from higher volatility in the years ahead and, I think, there are plenty of reasons to consider this high yielding ETF.

Let me know in the comments what you think of the JEPQ ETF or if another ETF has performed better. I know everyone would like to review.

Until the next post.

God bless,

Jeff

<p>The post JEPQ ETF: Capable Growth, Higher Income first appeared on UQinvest.com.</p>

Now, let’s focus in on the relatively unknown QQA ETF or, the Invesco QQQ Income Advantage ETF. QQA is an investment vehicle that combines exposure to the Nasdaq 100 Index with an active option income strategy. QQA’s primary objective is to return investors an above average income, improved potential for growth, and all with a reduced volatility profile.

Additionally, QQA is managed by the same company responsible for QQQ. It seems perfectly reasonable to me to ask the question; who knows the QQQ ETF better than that funds own management team? This alone makes QQA an interesting, albeit newer contender to the income ETF space.

Finally, if you want to see how QQA is performing within my portfolio, you can check it out on my Unqualified Investors Portfolio page. If you’re looking for an income ETF that tracks the S&P500 then you may want to have a look at this recent post; “SPYI v ISPY: 1 Clear Winner between Two High-Income ETF’s”.

Post Agenda

• QQA ETF Overview
• Expense Ratio
• Liquidity
• Risk Overview
• QQA ETF Pros & Cons
• Investor Suitability

QQA ETF Overview

The QQA ETF is a new fund with only 6 months of history as of today. They were launched on July 17, 2024 with the chief goal of providing potential investors an above average income. Additionally, the fund seeks to maintain some of the growth prospects of the QQQ ETF they track.

The fund, through the use of ELN’s or Equity Linked Notes, creates a covered call strategy similar to that of JEPI or the JPMorgan Equity Premium Income ETF. The structure of the ELN, essentially a covered call, creates a premium that is then returned to investors.

The QQA ETF Fund Prospectus does make it abundantly clear they intend to track the underlying with what they call, a “full replication” methodology. Essentially, they hold an equal percentage of the investments within the QQQ ETF itself. Then, through the use of the aforementioned ELN’s, generate income. Not as clean as I would prefer but it has become pretty standard within the income ETF industry.

While the above strategy is their primary objective the prospectus does also mention something I haven’t seen elsewhere. Shortly into the “Principal Investment Strategies” section they mention the ability to hold additional derivative products as a hedge against adverse market movements. While the benefit, if there is one, remains to be seen it is nice to know that the fund doesn’t have to sit on their hands if the market begins to fall preciptiously.

QQA ETF Expense Ratio

QQA has bucked the prevailing trend in the high yield ETF space by making their expense ratio among the lowest I’ve seen today. With income or Nasdaq-100 income funds popping up seemingly by the day, I believe those that offer the best value will eventually become favored. But, that’s just my opinion.

Regardless, QQA has an expense ratio of just 0.29% which is lower than the wildly popular JEPI or JEPQ ETF’s both maintaining a 0.35% expense. Additionally, QQA has waived their expense fee until June 30th, 2025. Making their current expense ratio a whopping 0.00%! Not a bad proposition for a fund that largely mimics the two income focused alternatives I mentioned.

Liquidity

To say liquidity has been light would be an understatement at this time. However, given the brand power of Invesco and their flagship ETF, QQQ, I suspect that won’t last for long. But again, that’s just my opinion. If Invesco never advocates or markets QQA then liquidity may continue to flounder.

As of today, the ETF has an average daily trading volume of just 21,158 shares. Compare that to JEPI’s average volume of over 3 million and it’s clear they’re way behind the curve. That said, JEPI has existed since May of 2020 so it’s not exactly a fair comparison.

In all, liquidity just isn’t there at present and work needs to be done advocating for QQA throughout the investment community. If they do, then I believe investors will recognize the value proposition when considering their next income focused ETF.

Risk Overview

Investing in QQA, as with all equity investments, carries some degree of risk. Market risk, at today’s lofty valuations couldn’t be overstated and only time will tell how QQA weathers the eventual decline.

However, when considering QQA specifically there are a few risks to highlight;

• Sector Concentration Risk – The fund is heavily weighted to the technology sector.
• Options Strategy Risk – Limits potential upside appreciation potential.
• New Fund Risk – QQA has a limited operating history.
• Liquidity Risk – May be difficult to close a position during a tumultuous period.
• ELN Risk – Typically unsecured debt.

Now, while those don’t sound exactly appealing, keep in mind they aren’t unique to the QQA ETF alone. These newer risks are quickly becoming par for the course with regard to income focused investments. Only in time will we learn exactly what and how these risks reach out to sting us as investors.

QQA Pros & Cons

Like any income focused ETF the greatest pro in their favor is the higher income potential. Thus, I’ll avoid it in my discussion below, but do know that is largely the greatest pro to owning QQA or any income investment.

QQA ETF Pros

• Exposure to the technology sector and the innovation they provide.
• Lower volatility profile and downside profile inherent to higher yield investments.
• Lower expense ratio than similar funds and a zero expense ratio until June 30th, 2025.

QQA ETF Cons

• Limited track record with minimal performance history, as of today.
• Potentially reduced upside appreciation prospects.
• Complexity of the funds income production through ELN’s.

Investor Suitability

Primarily, QQA is most suitable to investors seeking higher monthly income. However, investors wanting exposure to the Q’s with some downside protection may also enjoy QQA. This lower volatility profile may be preferred with valuations where they are today.

That said, the fund does seek to appreciate and a longer time horizon investor would also be rewarded. Both through income today and appreciation over time.

Still, investors should consider the risks carefully and determine if it suits their particular tolerance. The relative newness of the fund coupled with current liquidity concerns may mean the juice isn’t worth the squeeze.

Final Thoughts

In all, the fund is new and with that comes a great deal of unknown. Not a feature most investors are particularly comfortable with. That said, everything was new at some point and avoiding QQA on those grounds alone may mean missing a great opportunity. The fund does offer an above average yield, currently around 10%, and the ability for management to take action if needed. Add to it the ability to invest into the QQQ but with a guaranteed higher income and the prospects for the fund are certainly there.

Still, the risks are real and only time can answer the bigger questions we all have. Will this fund exist in 5, 10, or 20 years? How does the fund perform if QQQ falls by 20% or more? All great questions and I guess if you’re up for it, meet me back here in 2030 and we will see.

Until the next post.

God bless,

Jeff

<p>The post QQA ETF: A Guide to the Invesco QQQ Income Advantage ETF first appeared on UQinvest.com.</p>

In the ever-changing world of ETF’s, investors are constantly seeking opportunities to maximize their returns while also managing their risk. Two ETF’s that have garnered significant attention recently are the NEOS S&P 500 High Income ETF (SPYI) and the ProShares S&P 500 High Income ETF (ISPY). Both funds aim to provide investors with high income from the S&P 500 index, but they employ different strategies. In this article, we’ll dive into the comparison of SPYI v ISPY, exploring their similarities, differences, and potential benefits for investors.

Post Agenda

• SPYI Fund Overview
• ISPY Fund Overview
• SPYI v ISPY Strategy Comparison
• SPYI Pros & Cons
• ISPY Pros & Cons
• Risk & Volatility
• Who is SPYI Appropriate for?
• Who is ISPY Appropriate for?

SPYI Fund Overview

SPYI is an actively managed ETF launched by Neos Investments. The fund’s primary objective is to generate high monthly income for investors while maintaining exposure to the S&P 500 index. SPYI employs a strategy that involves investing in the S&P 500. These holdings earn dividends and the income is enhanced with an options strategy.

ISPY Fund Overview

ISPY, on the other hand, is a passively managed ETF launched by ProShares. This fund tracks the performance of the S&P 500 Daily Covered Call Index. They seek to provide investors with high income through a combination of equity exposure and option premium.

SPYI v ISPY Strategy Comparison

When comparing SPYI v ISPY it’s important to understand the nuances of each fund. Let’s discuss several different characteristics of to highlight how each attempts to benefit investors.

SPYI’s Strategy

SPYI’s strategy is comprised of four main components;

1. Holding S&P 500 Stocks
2. Collecting Dividends
3. Covered Call Options Strategy
4. Long OTM Call Options

The fund sells call options on the S&P 500 index to generate additional income. However, they differentiate themselves by re-investing some of those proceeds into long out of the money call options. Most covered call funds in existence simply sell the calls to increase the income but SPYI attempts to capitalize on some of the upside beyond the short call by purchasing these additional calls.

ISPY’s Strategy

ISPY employs a covered call strategy but they do it through the use of swap agreements. Strong 2008 vibes anyone? Regardless, the strategy is pretty easy to understand, they;

1. Invest in S&P 500 Stocks
2. Sell Daily Call Options on the S&P 500 Index through swap agreements

ISPY seeks to follow the S&P 500 Daily Covered Call Index while also returning investors an above average income. Additionally, ISPY may receive dividends from their holdings. In all, the strategy is mostly straightforward, ignoring any risk from those swap agreements, the fund aims to generate a consistent income by selling covered calls on a daily basis.

SPYI Pros & Cons

No comparison would be complete with out a succinct list of pros and cons for a potential investor to consider. Below I’ve provided what I believe are several of the most important items for consideration.

Pros

1. Active Management could allow for future optimization
2. Additional upside participation, beyond the short call
3. Consistent monthly income
4. Tax Efficiency through the use of Index options
5. Diversified approach

Cons

1. Higher expense ratio – 0.68%
2. Additional complexity and management error
3. Limited historical data
4. Potential for underperformance
5. Reliance on the options market

ISPY Pros & Cons

Some of the factors affecting or contributing to SPYI are also present with ISPY. Both funds seek similar objectives, only through a different approach. The most notable, in my opinion, are listed below.

Pros

1. Lower expense ratio – 0.55%
2. Simpler Options Strategy
3. Stronger initial performance
4. Potential for lower volatility
5. Passive management may appeal to some investors

Cons

1. Swap agreements make me uncomfortable
2. Limited historical data
3. Less flexibility with passive management
4. Higher portfolio turnover from daily call options
5. Dependent on the S&P 500 Daily Covered Call Index

Risk & Volatility

To fully compare SPYI v ISPY, risk and volatility are important factors to consider. From a volatility perspective, ISPY exhibits slightly higher volatility day-to-day. As of this writing, ISPY has a daily average range of $.45 where as SPYI has a daily average range of $.39. Not a significant difference but certainly something to keep an eye on.

Neither fund is without it’s risk. Chief among those risks is the limited historical data available for both funds. Ideally, I think we’d all prefer to see how they perform during a bear market before contributing our limited capital. Still, from a return perspective, it’s hard to ignore ISPY’s commanding lead. As of tonight, ISPY has returned north of 12% in price appreciation compared to SPYI’s sub 7%.

In all honesty, no one knows how either fund will perform when the market eventually does roll over. Neither has been in existence long enough for this valuable data. On the surface, an argument could be made that additional income will buoy these funds compared to their growth focused peers. A feature both funds are eager to promote, but with such limited data the jury is really still out on how either ETF will perform.

Who is SPYI Appropriate for?

• Investors seeking income through active management
• Investors seeking income through options
• Investors wanting additional upside in a bullish market environment
• Investors prioritizing consistent monthly income

While each investor is different, I think these are some of the more important features for consideration.

Active management could be debated at length but the upside is a more flexible approach. Sure, this flexibility could lead to other problems but it could also lead to solutions to problems so I guess that knife always cuts both ways.

In all, SPYI is probably more suitable to someone wanting complete transparency. Their approach just seems more clear and isn’t clouded by whatever fully constitutes a swap agreement. Though, similarly, the strategies SPYI employs may be reason enough to avoid them just the same.

Who is ISPY Appropriate for?

• Investors preferring passive index based strategies
• Investors preferring more traditional covered call approach
• Investors seeking a lower expense ratio
• Investors prioritizing consistent monthly income

If you’re seeking a passive approach and wanting to avoid the cost of long out of the money options then ISPY could make sense. I personally feel more aligned with SPYI but I also hold ISPY. If you’re interested to see how each of these holdings is performing for me you can view my Unqualified Portfolio here.

Still, to date, ISPY has performed significantly better than SPYI and they also boast a lower expense ratio, I don’t see how anyone would argue with that.

Final Thoughts

Well that about wraps up our SPYI v ISPY comparison. Honestly, it’s getting confusing keeping up with all the new offerings in the income investment space. These two ETF’s specifically, confuse me on almost a daily basis given the similar symbols.

Regardless, I hold both investments and don’t have plans to dump either of them at this time. Both have provided a consistent and similar income. SPYI has returned slightly more in income but they’ve also performed slightly worse overall, so by total return ISPY is performing better.

In closing, to determine which ETF is more appropriate for you would come down to the features you prefer. If you want a lower expense ratio then ISPY is the clear winner. Should you prefer a higher level of income then I think SPYI is more acceptable. If you’re seeking higher total returns, you should probably consider other alternatives first, but in the SPYI v ISPY debate, ISPY is the winner.

God bless,

Jeff

<p>The post SPYI v ISPY: 1 Clear Winner between Two High-Income ETF’s first appeared on UQinvest.com.</p>

Let’s talk income investing, what it is and why it might make sense to include in our portfolio. If cash is king, then cashflow is queen? I’m not sure, but income investing is certainly about cash flow generation. In this post you’ll find a great many reasons why income investing may or may not be a useful investment approach.

Before I get ahead of myself, this post is not a recommendation to participate in any strategy. I’m just a stranger on the internet sharing some knowledge. Always check with a professional or fully consider the consequences before investing.

Post Contents

• Cash Flow
• Diversification
• Compounded Returns
• Asset Classes
• Risk Management
• Strategies
• Laddering Investments
• Uncle Sam and the Tax Bill
• Derivative Strategy Investments
• Downsides to Income Investing
• Interest Rates & the Federal Reserve
• Inflation: the Masked Bandit

Cash Flow

If you’re seeking a consistent income stream then income investing is one viable solution. By investing in assets that return a higher than average yield the investor will regularly receive income from such an investment.

Historically, cashflow is returned on a quarterly basis but monthly payouts are becoming more common. With the return of higher interest rates, more investors are turning to treasuries or bonds to both protect their capital and keep up with inflation. These assets commonly make coupon payments or return interest on a monthly basis. Because of this, many new income investment opportunities are electing to participate monthly as well. Additionally, several new investment vehicles have introduced the option for weekly dividend payments to make cashflow management easier than ever before.

Cash flow is the process of cash flowing from one hand to another. In this case, cash flowing from the investment back to the investor. How that cash flow is returned though is important. Most would prefer the dividend be paid as a qualified dividend but the reality is most assets designed for income do not. Rather, the capital is returned to the investor in a few ways; return on capital, non-qualified dividend, or interest income. All of which are considered ordinary income. We’ll talk more about this later but in short, ordinary income is generally taxed at a higher percentage.

Diversification

This can be a trigger word for many investors. Some demand it and others despise it. The argument in favor states that through a well diversified portfolio an investor will weather market turmoil with differing assets offsetting one another. The later contends that diversification limits return and is only suitable for someone lacking proper understanding.

Nevertheless it’s an important consideration prior to beginning any investment strategy. Fail to diversify sufficiently and the result could be a substantial loss of capital. Alternatively, over diversify and it’s difficult to get ahead as portfolio laggards continue to draw down potential capital gains.

With income investing, diversification can be a critical component to a successful investment. In my Unqualified Portfolio, I’ve opted for my income account to include a growth driver and several different income assets with a lesser allocation. I am however, mildly overweight in the financial sector as I attempted to diversify positions. I would have much preferred a closed end fund to minimize that concern but Robinhood doesn’t currently allow trading of closed end funds. For those interested, I have enjoyed good success with the Eaton Vance offerings.

Compounded Returns

As is the case with virtually every investment, investors seek to compound their returns over time. This is especially important to income investors if the goal is portfolio growth. However, most income focused investors are retired or nearing retirement so growth is usually a secondary concern. For them, safety of their principal balance and the generation of cash are the main attraction.

For those seeking growth, compounding the dividend payment by investing into additional shares can mean an ongoing income increase. Or as some view it, a pay raise! At every interval, investors not needing the cashflow today can simply put it back to work to generate a higher payment at the next payment date. Couple that with capital appreciation and the prospect for a healthy long term portfolio is clear to see.

For those seeking income, compounded returns is of lesser importance. While not out right neglected, income investors have identified the amount of cash flow they’ll need and maintaining that amount is the goal. In an ideal scenario, an investor would aim to generate enough cash flow to cover expenses while still returning a portion to the investment for growth.

Ultimately, it depends on what phase of life you’re in. Income investing may make great sense for those in retirement or nearing retirement. For those not there yet, income investing would be a reflection of risk tolerance and strategy to determine viability. I’ve personally adopted income investing for the sole purpose of paying for summer vacations. In theory, and given the accounts construction, I would be able to spin off enough capital each year without ever sacrificing the principal balance.

Asset Classes

The list of classes related to income can be long and their are nuances to each. Rather than a 100 point list I’ll highlight a few of the primary classes for initial consideration.

• Treasuries
• Bonds
• Corporate Bonds
• High Yield Equities
• Real Estate Investment Trusts
• Closed End Funds
• High Yield Accounts or Certificates of Deposit

Again, this isn’t an exhaustive list. Rather, I hope it provides a relative starting point for someone thinking of entering the income investing domain. I’ve also added some relevant links to each of these points to conduct further research. Otherwise, I’d turn to Google or any one of the many AI tools for queries related to income asset types.

Risk Management

Likely the most important component to any investment strategy. It’s important to never step too far over the risk tolerance line or you’re sure to lose sleep and begin sipping pepto-bismol instead of sweet tea. In my opinion, the bulk of this is handled prior to ever having invested a single dollar. It’s never advisable to invest capital that cannot endure market fluctuations. Said another way, don’t invest money that cannot be lost.

That sounds a lot gambling, I know. The reality is we never know when the next market surprise may occur. Imagine waking up the day everyone found out about covid-19 only to see your investments down 20-50%. If you wouldn’t be able to endure a similar scenario then it’s likely you’re assuming too much risk. For comparison, those that were able to whether the storm have enjoyed an epic bull market and the returns to match.

With regard to income investing, several different risk factors must also be considered depending on the type of asset selected. Interest rate risks, credit risks, concentration risks, and general market volatility are all necessary ruminations prior to income investing. As is the case with any investment strategy, an understanding of the potential risks aligns itself with the probability for success.

Strategies

Another broad concept for income investors to surmise would be which strategy makes the most sense for a presumably limited amount of capital. The number of strategies is as unique as the hairs on your head so there isn’t a one size fits all approach. Many income investors opt to alter common strategies in pursuit of their own established goals. Doing so can increase the complexity but also provide the expected reward.

Some common income investing strategies include;

• Building a diversified bond portfolio
• Investing in a diversified basket of dividend equities
• Savings in a high yield account
• Real estate investments
• Fixed income laddering
• Covered call or cash secured put writing
• Building a multi-asset income approach

I’ve personally opted for the multi-asset approach or as I see it a multi-bucket strategy. Where some money is in a savings account earning a smaller interest, some is in treasuries earning slightly more interest, and some is in the market via equities, REITS, or derivatives. A more complex approach but one that suits me and manages risk based on time horizon.

Laddering Investments

Typically reserved for fixed income assets laddering is an investment strategy whereby the investor staggers the maturity dates of an investment.

Consider a certificate of deposit (CD) investment;

An investor wanting to ladder such an investment would hypothetically invest $1,000 into a 1-month CD, $1,000 into a 3-month CD, and $1,000 into a 6-month CD. In this way, the investor would receive their balance and interest at the end of the identified periods. Should interest rates rise, they aren’t locked in to the lower rate and should they decrease they still have a higher rate on some of their invested capital.

Additionally, laddering may also be used elsewhere in the market. For instance, income investors routinely identify preferred assets based on payment dates. Through careful structuring of a portfolio an investor can reduce variability and provide an expected income stream at predetermined intervals. A valuable concept for those choosing an income investing approach.

Uncle Sam and the Tax Bill

I’ve heard it said that those who intend to remain wealthy must have an understanding of taxes. Whether that’s true or not is up to you but it is true that the government will take as much as much as it possibly can. Therefore, it must also be true that we demand to keep as much as we can.

Now, I’m not a tax professional and there really is no substitute for consulting with a tax authority. They have more knowledge and unique strategies at their disposal to minimize uncle Sam’s reach.

That said, dividends are generally viewed as a taxable event. There are unique circumstances when capital is returned that may not be taxed as income but by in large taxes are incurred at each dividend or interest payment. As such, it would be a great oversight to neglect the tax liability while structuring an income focused portfolio.

There are several tax advantaged accounts that an cashflow investor should consider with the most well-known being, Traditional and Roth IRA’s. I’ve personally elected to hold most of my higher paying assets inside a Roth IRA to avoid any undue tax burden. However, there are several other account types that may be of interest if they’re available to you. Here is an articles listing several different tax advantaged accounts.

Derivative Strategy Investments

As investors grow and change so do the products available to them. As of today, there is an emergence of income producing assets focused on the use of options to generate higher than usual levels of income. The concept isn’t new but the number of investable assets of this type seems to grow each day.

In short, options are a derivation of the underlying security. Offering an investor the opportunity to mitigate risk, speculate, or generate an income. Through strategic covered call campaigns or cash secured puts an options investor may generate an additional 10-20% of income from an investment. Of course, there is no free lunch and options have unique risks and characteristics but that hasn’t stopped the onslaught of these assets.

There are several types of derivative strategy investments available but the most common utilizes a covered call system to generate additional income. Meaning, these investments can achieve upwards of 40% or even more in yield per year. Making the risk of principal erosion an important focal point. In fact, most assets in the space have a declining share price and are not intended for most investors.

Still, they offer an income investor plenty to consider. Personally, I’ve elected to use them as the smallest portion of my income producing account with hope they will meaningfully boost the income without completely destroying the total return profile. The later is still in progress though so more time is needed for me to fully evaluate this class of income producing assets.

Downsides to Income Investing

As is the case with literally every investment. Income investing isn’t without a fair number of challenges. Many of which make this approach one several investors simply say, “no, not gonna happen in a million years”. For them that is the correct response. Their risk tolerance or goals may be harmed adopting such a technique.

Of the common detractors to income investing, here are a few;

• Limited Growth Prospects
• Interest Rate Risks
• Concentration Risks
• Credit Risks
• Opportunity Costs
• Capital Erosion

Most of these have been discussed previously but as a brief review, income investing can limit the growth potential of an investment. Assets paying out an above average income typically don’t see explosive capital appreciation. In fact, the lesser desired outcome is more often true. Many of these assets face share price erosion over time and thus a poor investment choice for a great many investors.

The risks discussed earlier are the same here. Concentration risks essentially highlights the tendency for an investors to place more capital than they otherwise would solely for the benefit of a higher yield. Credit risks are really an evolution of the 2008 financial crisis, in my opinion, when the world took notice that corporations shouldn’t be trusted. In essence, credit risks arise when the institution defaults on its obligations.

Also true for any other investment is the opportunity cost. For example, suppose an investor elected to deploy a treasury ladder at 5.35% interest over the next year. So long as the US government didn’t default they would enjoy the payout from that ladder over the time period. Alternatively, they may have invested in Microsoft(MSFT) and earned 15% over the same period. Obviously, Microsoft performed better in this scenario. However, the opposite could also be true and Microsoft could have declined instead. The opportunity cost arises as an investor selects one avenue over another.

Interest Rates & the Federal Reserve

The Federal Reserve(FED) is the US’s central bank, established to create a stable monetary policy and financial system. As the FED raises or lowers interest rates they have an impact on the economy. Effectively impacting people and businesses ability to borrow. When interests rates are low, the idea of borrowing for a house or for capital expenditures becomes more enticing and therefore a boost to the overall economy. On the other side, when rates are higher or more restrictive, less borrowing occurs and as a result, less expenditures. The role of the Federal Reserve is to attempt a balance between the spectrum of accommodative and restrictive policy.

For income investors, the Federal Reserve Rate is of unique importance. As they raise or lower this rate, our income can also raised or lowered. For example, consider a bond investor deciding to invest when interest rates were relatively low. As the rate rises, the value of this investors bonds will decline because newer bonds offer a higher yield with the new higher rate. This may result in a capital loss to an investment largely considered safer than other assets on the risk scale.

In all, it remains important for income focused investors to stay abreast of changes or the possibility of changes to the Federal Funds Rate. I don’t personally believe it should be the primary consideration but it can not and should not be ignored.

Inflation: The Masked Bandit

Inflation can best be compared to rust. It’s the slow but ever present corrosion of our asset or our purchasing power over time. For context, $1,000 dollars in the year 2000 is the same as $548 dollars in 2024. In the past 24 years our purchasing power has declined by roughly 50%. For those opting to put there money under a mattress, they now have far less money than they once did.

Inflation is generally viewed by most Americans negatively. The idea that our money buys less over time isn’t a great quality, I’ll admit. However, had the investor that put that money under his mattress earned only 2-3% his money would still be as valuable today. Had this investor invested it in the S&P 500 his $1,000 would now be worth $2,533. Effectively beating inflation and earning a nice return.

Final Thoughts

In the end, whether income investing is the correct approach for you boils down to your risk tolerance, goals or objectives, and management ability. For me, income investing is a staple of my investment approach. All be it, to a much smaller extent. Still, the approach is one many investors enjoy each day as they’ve structured their holdings to provide for their lifestyles.

Income investing, like all forms of investing, has risks associated. Not understanding those risks or neglecting them all together is sure to bring financial loss. However, with careful consideration and a strategy for implementation it is possible to generate a stable, recurring cashflow portfolio.

By maintaining adequate diversification, conducting regular portfolio reviews, and staying abreast of economic changes investors can harness the power of income investing to achieve their financial goals.

Until next time.

God bless,

Jeff

<p>The post Income Investing: Building Steady Cash Flow first appeared on UQinvest.com.</p>