Transcription
up to 8.21% annual cash payouts and some equity upside. Let's compare JACHD and Jeffy today.
Hello Diamond Estee members, super savers and course fans. I hope you're healthy and well, and welcome back to part two of our series on how to build a safe and predictable income stream in 2026. In part one of this income series, link below for your convenience, we talked about how you can lock in an attractive rate for 30 years or more with certain types of safe bonds and even for the rest of your life, for example, with a single premium immediate annuity or SPIA. And personally, I think that nearly every investor who is getting close to retirement or who is already in retirement should consider a closer look at what we call our seven safe and predictable building blocks for income when you put together the core or fundament of your portfolio. But what if you don't want to commit all your money for that long and or what if you want to explore opportunities for higher income and don't mind taking on a bit of additional risk and complexity for that extra upside? Well, that's exactly what we'll be discussing in this video. Our three secret investments for higher income.
Here are the three topics I'll be covering today.
One, why might you want to consider our three secret investments for higher income and what are the trade-offs that you may need to accept? Now, some of our Diamond Nest members and regulars already know what some of these secrets are since we have covered them before in greater detail in our member zone over the past few years. But I think it can never hurt to have a friendly beginning of the year reminder, especially since higher income is top of mind for many folks now that Tbo rates have moved steadily lower.
Two, how do Ja, SCD, and Jeepy achieve this higher income and what is their track record?
And three, what's our perspective? Let's dive in now folks.
Why might you want to consider our three secret investments for higher income? And what are the trade-offs that you may need to accept? As our trademark saying goes, everyone's financial journey is different. But most people typically like the investments that we're going to discuss today because these investments have three main advantages. One, the potential for a higher income stream, meaning the higher cash distributions as the industry calls it. Two, the flexibility that comes from not being locked into an investment for the long run. And three, for the equity-based instruments, you'll even keep a part of the upside in the stock market on top of the higher payouts. So far so good, but as always, there's no free lunch in finance. So, let's go through the three potential disadvantages or risks of our three secret investments for higher income that you should keep in mind when you decide how much of your portfolio you want to allocate to them.
First, while all three of the investments that we're going to discuss today are flexible and liquid, none of them can lock in a rate for the long run. Their cash payouts, their distribution yields may be attractive right now, but they will fluctuate over time.
Second, these instruments may carry higher risks and be less predictable than their nearest equivalent from the seven safe and predictable building blocks for income that we discussed in the last video. And while some of these instruments may protect your principle reasonably well andor even have room for an upside, you may also lose some or even all of your initial investment with others.
Third, these products can be complex and are not always easy to understand. It may take a bit of time, effort, and willingness to learn and fully grasp the underlying risk profile of what you're buying. And even if you delegate the day-to-day management to professionals by buying an ETF, which may be a sensible decision here for most retail investors, by the way, in doing so, you will always lose a bit of the three C's that you would have benefited from if you'd invested directly in the underlying instrument. Here again are the three C's that we often discuss here on this channel. By buying an ETF, you will lose some clarity and control and add some cost versus a direct investment in the underlying product.
Now, let's move on to the core of today's discussion. How do JA, SCD, and Jeepy achieve this higher income and what is their track record? As so often with us, this table here should give you a good overview of our three secret investments for higher income. And for those of you who appreciate this, I thought I was old when I fondly mentioned Lotus 123 from the times before Excel took over everywhere. But kudos to our members and Super Savers who built their first spreadsheets with Multilan, Vizyalc, and Supercal. This column here shows the investment we're discussing, followed by the ticker of the instrument that we picked as an example for a deep dive and a short explanation of its risk profile. In the next column, we explain the liquidity and after that we have a short note about taxation when held in a taxable brokerage account. As usual, please keep in mind that we're not tax advisors. So, if you have more detailed taxation questions, do consult with your trusted tax advisor about your personal situation.
In the next column, we show the distribution yield, essentially the percentage of cash income that you might expect on an investment based on its recent share price. We use the 30-day SEC yield, which calculates the cash income over the past 30 days, annualizes it, and divides it by the share price at the end of the last observation period. This method is not perfect, and future payouts to the rates are never guaranteed for any instrument on this table today. We'll explain why as we go through each one in greater detail. Nonetheless, the 30-day SEC yield is still the most current measure that we have, and it should give you a good feeling for what cash payouts you might have received had you invested historically. That said, the cash income is only one part of what an investor can earn from an investment. Capital gains or losses from rising or falling share prices are the second component. This combined picture is captured here in the 5-year trailing total return number that indicates how much annualized total return from both distributions and capital gains you would have seen if you had invested 5 years ago. And of course, we'll also give you our thoughts on who should or should not consider these particular investments.
First on our list of three are collateralized loan obligations or CLO's. CLOS's are highly structured investments that essentially take a portfolio of mostly non-investment grade corporate loans and divide it into different tanches that are ranked in order of priority when the cash flow is distributed. CLLOs's are not for everyone but the best rated ones come with a strong track record. As far as we know, not a single AAA rated trunch of a CLLO has ever defaulted. Not even during the great financial crisis of 2008, 2009 or COVID. We picked JAA, Janice Henderson's AAA CLLO ETF as our example here, which as the name says is AAA rated. It has $25 billion in total assets, making it the largest CLO ETF at the time of this taping. Do note that there are other CLLO ETFs out there, including some with higher risk and higher return strategies, but we will leave them aside for the purposes of this video. For VIP members, please refer back to this video on JAA versus other CLLO ETFs if you need a refresher.
So with its strong rating and track record, JA is considered basically free of credit risk by many market analysts and its share price has historically fluctuated only slightly which means that your initial investment should be largely protected. However, it remains a highly structured product at its core which may imply some residual operational risks. The underlying corporate loans in JAA's portfolio are usually floating rate, which means that JAA yields will generally follow the Fed funds rate closely, although with a bit of a spread or a bit of extra yield on top. JAA is liquid as an ETF, and its distributions are fully taxable as ordinary income. As for its track record, JA's latest distribution yield was 4.95%. In comparison, the 3month T bill paid about 3.6%. 6% at the time of this taping. The annualized total return over the past 5 years was 4.57%. So very similar to the cash distributions, which tells us that JA did not generate much capital gains as it is indeed not set up to do anyway. JAA and other highly rated CLO ETFs might be something for an investor who wants a cash alternative. An investment that is almost as safe and liquid as cash or short-term T bills, but earns a higher return. And the fact that JAA also has a track record of only small fluctuations in its share price is usually taken as a sign that your initial investment is largely protected. What speaks against JA then? Right. besides the small share price fluctuations. Well, it's really whether you can get comfortable with highly structured products. If you can, then JA might be a good addition to your portfolio. But if you just don't trust the alchemy of squeezing a slice of AAA risk out of a portfolio of non-investment grade loans, so to speak, then JA is not for you. Don't buy an investment that keeps you up at night. The few basis points in difference may just not be worth it.
Second on our table today are dividend shares. Dividend shares or dividend equity are essentially regular common shares with a track record of paying high and sustainable dividends. You can select them yourself or buy an instrument like Schwab's US Dividend Equity ETF, SCHD, which we've selected for this comparison because many of our Diamond Nestic regulars own SCHD in their portfolio andor have asked about it recently. SHD has total assets of 73 billion invested into 102 positions, mainly but not exclusively, S&P 500 large caps. In principle, owning SCHD is like owning any equity fund in that it exposes you to the full principal risk of the portfolio. In good times, you'll get the upside from owning the shares, but in bad times, you'll also take the full hit from declining prices. Remember, rates are not guaranteed to maturity because dividends are never guaranteed. Even though if we look at the history, many if not most dividend paying companies will try to keep their payouts as stable as possible through times good and bad. Given its size, liquidity is generally not an issue for CHD. And one more advantage of a dividend strategy, if all other conditions such as the minimum holding period are met, the dividends may be considered qualified by the IRS and taxed at the lower long-term capital gains tax rates. In fact, this applies to almost 100% of SHD's dividends. It also means that SCHD's distribution yield of 3.81% may be equivalent to as much as 4.59% for taxpayer in the highest federal income tax bracket when compared to fully taxable interest income. That said, SHD's 5-year trailing total return of 8.95%. Isn't that great? Even for a dividend fund, there are dividend funds on the market that have higher returns than SCHD, but this often comes at the price of a lower distribution yield. As Marcus likes to say, dividend funds also come in many different flavors, but that's a topic for another day if there's enough interest.
So to summarize it in my own words then SCHD could be mainly interesting for investors who like the attractive distribution yields. Now they're never guaranteed going forward, but 3.81% is not bad as a start, and the 4.59% tax equivalent yield for someone in the highest federal tax bracket even gets us close to JA's fully taxable 4.95%. The main difference lies in the principal protection though. JAA almost guarantees your invested capital but doesn't offer inflation protection. It's really best considered a cash alternative. As I mentioned earlier, SCHD on the other hand remains at its core an equity fund which means that it offers some protection against inflation but also exposes you to real principal risk. The share price will go up and down with the markets. Meaning that with SHD, your initial investment is never guaranteed, but you may benefit if the markets do well in the long run, and you may lose out if they don't.
Which leads us to the third investment for today, covered call strategies. Covered call strategies are also built around an equity portfolio, but try to maximize the income generated by writing call options on the shares they own. When you sell a call option or write a call option as the industry says, you collect a premium but give the buyer the right to buy a certain stock from you at a predefined price at some point in the future. This is known as a strike price. If the stock price doesn't go higher than the strike price, nothing happens. You just collect your options premium as extra income. If the stock price rises above the strike price though, the buyer will pretty much always exercise the option and buy the stock from you for less than what it's now worth on the open market. This is the mechanism that caps your upside with a covered call strategy. In any case though, you still keep the options premium. Some investors set up covered call strategies on their own, but more do it indirectly via ETFs like Jeppy, JP Morgan's equity premium income ETF, which has assets of 42 billion and holds 125 positions on which it writes call options. The upside of the strategy is clear. You keep the dividends that the stocks in your portfolio pay, plus you earn options premiums on top. With this strategy, however, you keep the full equity risk of your portfolio on the downside. Your position will fall with the market while your upside is capped because the options put a ceiling on your capital gains even in the strongest market. You will also carry some residual options risk, but this should be minimal if well executed. And of course, both dividends and options premiums will fluctuate with the economy and the markets. So, your payout is not guaranteed.
And if you're interested in learning more about covered call strategies, Jeppy, and funds similar to Jeeppy, I invite you to join me, Marcus, and our Diamond Nestic members in our brand new VIP member community, especially if income generation and income protection are top priorities for you this year as rates are expected to move lower. Our brand new VIP member community is a completely upgraded experience from our old YouTube member zone. And if you already understand the fundamentals of bond investing and managing your portfolio yourself, our Diamond Nestic VIP member community is the ideal place for you if one or more of these points apply to you.
One, you're already in retirement and want to have a forum for an extra pair of eyes for critical questions.
Two, you're not yet in retirement, but are actively thinking about it for yourself or a loved one and want to get ready to take the decisions that lie ahead.
Three, you have questions about how a product works and what the benefits and risks may be.
Four, you follow the markets and want to be the first to know about safe and or higher yielding investments.
Five, you want to understand new offerings and trends and decide whether they might be something for your portfolio.
Six, you want to exchange perspectives with a like-minded community of safety conscious and income-minded investors who do not want to give up on good returns either.
Seven, you're a lifelong learner who enjoys discovering hidden investment gems and sharing with others in a more private setting.
So, if you check one or more of these boxes, visit our website at www.diamondestic.com at diamondestic.com and click on this yellow private VIP member community button to grab your $100 early bird discount before we officially launch on January 15th.
For today, let's wrap up our overview of Jeppy. Jeppy is a liquid ETF and the stock dividends it passes to its owners may be treated as qualified dividends by the IRS. However, last time we checked, 80% of Jeeppy's distributions come from options premiums, which are fully taxable as ordinary income. So, the potential tax relief here is much smaller than for direct dividend strategy. Jeffy's 30-day SEC yield stands at 8.21% at the time of this taping, and the 5-year trailing total returns at 9.76%. which seems to be the main reason why Jeeppy is a fund that our diamond nestic regulars often ask about. In fact, this track record is even better than SCHDs on our table. So, when would you go for which fund? Now, both funds are equity funds with full exposure to any downside in the markets and both of them cannot guarantee the distribution yields. So, it really comes down to one key question. Are you comfortable with a fund whose income stream relies basically on options? Just like some folks don't like the heavy financial engineering that CL ETFs use, others do not like the derivatives that funds like Jeppy use, you should really only take a deeper look into Jeppy if you are comfortable with its use of options to generate income. If you're not, then SHD may be the better choice despite its weaker track record historically. And if you don't have a clear opinion here andor you just can't decide, you may even mix and match the different products.
Bringing us to the next part of today's discussion. What's our perspective? In my mind, all three of the secret investments for higher income that we discussed today can serve a constructive role in a portfolio. JAA is an investment that is almost as safe and liquid as cash or short-term T bills, but earns a higher return. A higher yielding cash alternative if you want. AAA rated CLLO tanches have a perfect track record as far as we can tell. But of course, you'll need to be comfortable with the degree of financial structuring involved in making JAA work before you buy it for your personal portfolio.
SCHD, or any other dividend strategy as an equity investment that can generate an attractive income stream, especially if you're in a high tax bracket and will benefit from the potential taxation as qualified dividends. Like any equity investment, SCHD offers some protection against inflation and lets you keep the upside from the markets, but it also exposes you to real principal risk when share prices go down.
And Jeffy as an equity investment that squeezes the most income out of an equity portfolio, so to speak. The distribution rates can be very attractive and the covered call strategy doesn't add to the underlying principal risk, but you remain fully exposed to the falling share prices while your upside is capped. And of course, Jeppy will only be for you if you can get comfortable with its reliance on options for distributions and returns.
Do note though, I think there are three secret investments for higher income. JAA, SHD, and Jeepy. They're best used to diversify a portfolio and enhance its risk return profile, but are less suited as fundamental core investments in an income portfolio. When I think about the personal retirement plans that Marcus and I have, for example, I want to build a safe and predictable income stream first at its core. meaning that I would look at some of the seven safe and predictable building blocks for income from our first video that would allow me to lock in a guaranteed rate for the long run or even the rest of my life. And then as a next step, I would add additional instruments like JA, SHD or Jeeppy to diversify my portfolio. I do like the additional income potential as well, but that's me and Marcus.
What about you? Are you sticking super safe with treasuries and agencies going out longer or are you going to check out JACHD or Jeep after this? Or do you have a secret investment for higher income that you'd like to share with everyone? Drop a comment below and let us know.
And again, if income generation and income protection are top priorities for you, we invite you to get early access to our brand new VIP member community, which will be officially launching on January 15th. Consider today's video an appetizer. The main course and dessert are still to come. Just visit our website at www.donestic.com diamondestic.com and click on this yellow private VIP member community button to grab your $100 early bird discount before January 15th.
All right, members, Super Savers, and Barn Course fans. I hope you enjoyed today's video and learned something new. And see you again very soon with more brand new wealthb buildinging content for your financial journey.