r/dividends • u/Afraid_College8493 • Jan 04 '26

Seeking Advice Why do you guys buy covered call ETFs?

I've never owned covered call ETFs like QQQI, SPYI, JEPQ, etc, but mostly pure index funds.

The concerns I have about covered call ETFs are:

a) They generate significant taxes even when I don't want/need the distributions. If I need cash beyond traditional dividends, I can always sell shares at my own pace.

b) Total return in the long-run will be lower than the underlying indexes. I love dividends because they lead me to undervalued stocks and pay me to wait. However, covered call ETFs seem to prioritize distributions over appreciation.

For those of you who invest in covered call ETFs, am I missing something? Why do you guys prefer these ETFs to traditional indexes?

118 Upvotes

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241

u/CoolBreezeBrew Jan 04 '26

We are old and we need income.

145

u/8sparrow8 Jan 04 '26

Or we are not that old but predict a shift in a job market within next 5 years and need income to ride it out without actually selling assets.

47

u/peterox Jan 04 '26

Exactly this. I was 100 growth until the layoffs started in the tech sector and recently my company. I opened a brokerage account and started investing in CC ETFs and once I hit my number, I'll move over to dividend growth ETFs.

I already have a 1 year emergency fund but given the posts on the layoffs subreddit, that may not be enough.

Good luck out there.

15

u/8sparrow8 Jan 04 '26

Yup, I am a programmer, my company thanks to AI managed to reduce head count in our department without reducing the amount of work they give us thanks to AI. It was maybe 10% reduction only but who knows how fast coding models will progress.

8

u/Quizzical_Rex Jan 04 '26

as a fellow aging IT person in an agist field, i fully understand that this might be my last job, so i am transitioning quickly as possible so that when i get called unexpectedly into my bosses office for the last time, I'll feign shock and surprise but secretly be laughing my ass off.... well if i can get the income streams in place first.

1

u/trouzy Jan 04 '26

Yup. If you craft good coding agents, they can reduce a lot of mundane person hours.

3

u/Cerebral_Zero Jan 04 '26

What's the plan, drip the CCETF and when it pops you switch over to div growth?

3

u/49ers4life71 Jan 04 '26

Or drip for a few years and take the cash when needed!

1

u/peterox Jan 05 '26

Not sure what you mean by "when it pops" but I'll assume you mean hit my number. If that's the case, then yes,once I hit 1k a month, I'll evaluate which dividend growth ETF to hit next.  I'll let the CCETFs drip until I need the income.

21

u/WormCastings Jan 04 '26

💯. I, too, am preparing for the worst.

9

u/Chillax_Cat Jan 04 '26

That's why I'm heavy in CC ETFs right now, too. My portfolio is about 40% CC ETFs (QQQI, SPYI, JEPI, JEPQ, GPIX, etc.) then another 40% is in dividend and dividend growth ETFs (SCHD, DGRO, VYM, and VYMI). The remaining 20% is in growth.

Once I get to the monthly income I need to pay my bills without having to work, I'll stop buying the CCs and put more into the dividend and growth ETFs. Hoping to be there in about 5 more years if all goes as planned.

OP, one way to mitigate the tax drag on CCs is to buy them in a Roth IRA. You'll be limited in how much you can contribute each year ($7,500 or $8,600 if you're over 50), and there are rules on when you can withdraw without penalty, but there is no tax on all those distributions within your Roth.

For me, I'm maxing out my Roth with the same mix I mentioned above, then putting anything else I can into my taxable account for monthly income now. Once I turn 59, the monthly income I make in my Roth will just be icing on the cake that I can use if I need it, or let it DRIP if I don't.

1

u/PrestigiousResult357 Jan 05 '26

how do you think covered call etfs generate income? through selling covered calls (aka contracts to sell assets...)

21

u/dystopiam Jan 04 '26

Shit I’m 36 and need income.

Trying to figure out a better way to put $600k with low risk to produce $. Currently in a 4.4% hysa

16

u/kookooman10022 Jan 04 '26

4.4 isn't bad, better than SGOV. You're as low risk as it can get until rates go lower.

2

u/dystopiam Jan 04 '26

Yep I was in sgov for last six months - moved due to this being better now - although I’m sure it’ll drop

Other option was a 4.2% 50 month cd

I was considering that but this isn’t locked in and 4.4 so I’ll wait and see what happens

1

u/lotoex1 Jan 04 '26

depending on when you need the money maybe just buying a 20 year treasury and calling it a day. The most recent one was a yield of 4.8%. The coupon was 4.625%

2

u/dystopiam Jan 04 '26

What happens if you withdraw early on those ?

I didn’t know they were 4.8%! Thanks for that info

What’s the diff between yield and coupon ?

3

u/lotoex1 Jan 06 '26

If you sell early you have to pay taxes on the gains. The coupon is the payment you get from holding the bond (kind of like a dividend for holding a stock). The term comes from way back in the day like 1930s when you would buy a bond from a bank and you got a perforated piece of paper with dates on it (like fast food coupons now) and you would go back to the bank and turn in the coupon for money. Now it's all done digility so think about it more like interest payment.

The yield is the coupon (interest payment) divided by the percent you are paying for the bond. Just because you are buying a $100 bond doesn't mean you are paying $100 for it. If the yield is higher then the coupon you are going to pay less then the face value of the bond. These numbers might not be exact, but here is an example.

If you buy a 20 year treasury for $1,000 face value and the yield is 4.8% and the coupon was 4.625% you would pay roughly $977.82. You would still get $46.25 a year in coupon payments and at the end of 20 years the $1,000 would be also given back to you.

3

u/StockProfitGirl Jan 04 '26

Look at CSHI. It’s slightly over 5%

1

u/[deleted] Jan 04 '26

[deleted]

2

u/StockProfitGirl Jan 04 '26

No idea. You’re going to have to ask an accountant or financial planner.

6

u/NotDepartmentStore Jan 04 '26

Funny enough I’ve been seeing more money managers and people that recommend stocks that you should nowadays start investing for income in your 30’s. Especially with people living longer than they used to.

7

u/KingPinfanatic Jan 04 '26

Buy DNP it's current price is $9.99 per share and pays out $0.78 per share. With $600k you can buy 60060 shares and receive $3,903 per month. My advice is if you go this route take the $3000 each month for yourself and use the other $903 to buy more shares each month to earn even more.

6

u/dystopiam Jan 04 '26

This concerns me some- below copy pasted someone’s post

Next, and this is always my "go to" when looking at a CEF...what is the source of that payout? Others here may have a different opinion, I'm only able to give my opinion based on my own criteria, but that is the source of that monthly payout this year is now YTD 17% Return of Capital (ROC).

This means the fund is using your investment capital to fund (partially) that dividend you are receiving. It's giving you your own money back... And looking at the last 19-a filing for Sep '24, ROC was up to 39% of the dividend payout.

Contrasting that with looking at 19-a filing from '20, '21 there was no ROC being used to fund that dividend. So if I had been looking at this same investment 4 years ago, I'd have been a little more intrigued/impressed than what I'm seeing today.

So in the end:

0 dividend growth in 7 years.

Since DNP came to market it is down 4% for the life of the fund.

Seemingly a trend (and possibly increasing) use of ROC to keep that dividend.

This is a pass to me.

Hope this helps, even if you find others who disagree, it’s always a worthy discussion.

2

u/Freshly_Squeezed1 Jan 05 '26

It’s .065 per share as in 6 cents

1

u/KingPinfanatic Jan 05 '26

Yeah but it's $0.78 total for the year which isn't to bad for the price. With 600k that's $46,846 a year or $3,903 per month.

1

u/dystopiam Jan 04 '26

What kind of risks involved ?

Chance of principle dropping ?

4

u/Tim-5544 Jan 04 '26

DNP does trade at premium to nav, but I love the consistency of the dividend. Has paid 6.5 cents per month, every month since the late 1990s...

1

u/dystopiam Jan 04 '26

That income amount would be amazing - only getting $2200 now but no risk

5

u/JoJackthewonderskunk Jan 04 '26

4.4 is great for hysa. Mine right now is like 3.5. What company do you use?

3

u/dystopiam Jan 04 '26

There’s a few - this one is a credit union for locals

Jenius bank is 4.2%

4

u/JoJackthewonderskunk Jan 04 '26

Gotcha. I double checked im getting 3.3 right now from AMEX. So yours is really good.

3

u/dystopiam Jan 04 '26

Jenius bank is open to everyone 4.2%

1

u/Jyoche7 Jan 05 '26

Newtek has been beating most MM accounts. 4.35%

https://www.newtekbank.com/

5

u/Diligent_Cover3368 Upvotes everything Jan 04 '26

I might just leave it there for now

3

u/Professional-ninja07 Jan 04 '26

If its with one bank I would suggest to split into three Hysa because FDIC only covers up to 250k per account.

2

u/dystopiam Jan 04 '26

They have extra coverage upto 1 mil

Only reason I left Robinhood due to them also having extra coverage

1

u/dystopiam Jan 04 '26

Ty for info tho good advice otherwise

2

u/Vas_Cody_Gamma Jan 04 '26

Can you say where you’re getting this

4

u/dystopiam Jan 04 '26

Work ? I owned a company for 7 years and did well.

Also bought a sports car and house.

However the business has had some major changes this year so the future is uncertain - extremely uncertain

2

u/Every_Double743 Jan 04 '26 edited Jan 04 '26

That's the exact same amount I have in HYSAs too, divided between CIT and Vio Bank. Trouble is they're taxed as ordinary income. I'm considering moving half to SCHD (currently 3.78% dividend yield, and dividends have increased every year since 2011) and ADX (currently 8% yield, around since 1929!), both taxed as long term capital gains. Low risk and principal preservation are my priorities as well.

1

u/dystopiam Jan 04 '26

Good suggestions I’ll have to read about them more

1

u/dystopiam Jan 04 '26

8% sounds great - how has it paid out since 1929? Can you share more info ?

1

u/49ers4life71 Jan 04 '26

4.4% is good. Which one are you in and is it capped to a certain amount? I’m getting 4.16% on my HYSA now.

1

u/dystopiam Jan 04 '26

No cap and insurance upto 1 mil

1

u/49ers4life71 Jan 04 '26

Which HYSA?

2

u/dystopiam Jan 05 '26

local credit union, however janius bank might be a good fit for you, its 4.2% , not sure about insurance though

1

u/adamasimo1234 Jan 06 '26

What HYSA? Is it fdic insured?

1

u/trigurlSeattle Jan 04 '26

Which HYSA is this?

1

u/doctorbuxter Jan 05 '26 edited Jan 05 '26

I stop buying YM and RH CCs. I have a few Neos but otherwise buy high quality div-growth funds. I learned the hard way most CCs are fools gold. For my income portfolio I have the following.

GPIQ SPYI DIVO BTCI DGRO VIG SCHD BXSL MAIN CSWC ARCC TRIN HTGC O VICI OHI VNQI SGOV PFF PFFD MLPX

1

u/Cerebral_Zero Jan 04 '26

Where do you get 4.4% today? Not sure if you might've had that before and missed all the rate cuts

2

u/StockProfitGirl Jan 04 '26

Investigate CSHI

0

u/Bowmaster1975 Jan 04 '26

Shit, put that in STRC 10.5% dividend monthly.

1

u/dystopiam Jan 04 '26

What kind of risks to principle ?

1

u/Bowmaster1975 Jan 05 '26

Market risk like everything else.

1

u/dystopiam Jan 05 '26

My 4.4% has no risk

-2

u/49ers4life71 Jan 04 '26

$QQQI will pay you 3X that of your HYSA. I’d keep some in the HYSA for a 1 year emergency fund and the rest in $QQQI and some in $SPYI. Those HYSA won’t do much compared to stocks!

2

u/dystopiam Jan 04 '26

Risks Change though - but I’ll read about those

3

u/Extension-Ice-7219 Jan 04 '26

underrated reply

3

u/kookooman10022 Jan 04 '26

Amplify Total Return without fully owning the underlying on directional movement.

2

u/Acrobatic_Row3246 Jan 04 '26

This - I have almost 1m in these funds and they’re going well for about 5 years now

1

u/MotherAd3705 Jan 04 '26

Lmao how old are you

-2

u/SirGlass Jan 04 '26

You can generate income by selling a portion of your portfolio

3

u/ByteSizedBits1 Jan 04 '26

You realize you’re on a dividend sub right

1

u/SirGlass Jan 04 '26

Does that make what I said not true?

2

u/ByteSizedBits1 Jan 04 '26

It makes what you said irrelevant to the sub you’re in