You don’t need to buy growth stocks to succeed in the stock market.
From early 2023, Nasdaq Composite Index It showed a staggering increase of 62%. S&P 500 It’s up 38%. That’s a nice rally, but some investors might be concerned that the market is coming under selling pressure.
While it’s never a good idea to revise your investment strategy based on speculative hunches, there are safer stocks and exchange-traded funds (ETFs) that can help reduce downside risk. JP Morgan Equity Premium Income ETF (JEPI 1.00%), JPMorgan Nasdaq Equity Premium Income ETF (JEPQ 0.20%)and Walmart (WMT 1.34%) It’s a good deal to buy now.
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Two actively managed funds with clear goals
JPMorgan Equity Premium Income ETF is an actively managed fund that invests in the S&P 500 and generates income through equity-linked notes (ELNs) and covered calls. JPMorgan Nasdaq Equity Premium Income ETF does the same, but uses the Nasdaq-100 as its benchmark rather than the S&P 500. The Nasdaq-100 is the largest 100 non-financial companies included in the Nasdaq Composite.
ELNs combine bonds and equity options to generate income and benefit from the potential appreciation of stock prices. Essentially, ELNs are an alternative to low-yield and fixed-income products, offering greater upside potential but also potentially lower returns if the options expire worthless.
Covered calls can be sold on stocks to make a profit. In exchange for receiving a premium, the call seller limits the upside potential.
Let’s try it Microsoft (Nasdaq: MSFT) As an example, Microsoft stock is priced at around $430 per share. Let’s say you want to sell $450 covered calls in August 2024. As of this writing, the options are priced at around $10.70. The buyer pays $10.70 per share up front in exchange for the option to buy the stock for $450 any time between now and the expiration date of August 16, 2024. Dividing the $10.70 premium by the stock price of $430 essentially guarantees a 2.5% yield in a few months.
The covered calls will generate a higher return than holding the stock unless Microsoft rises above the strike price ($450) plus the call premium ($10.70), which is $460.70. At that point, you would be better off just holding the stock rather than holding the stock and the covered calls.
If stock prices rise slightly, remain flat, or fall, a covered call strategy can be more advantageous than holding stocks. 2022 is a good example of this: While the S&P 500 generated a total return of -18.1%, the JPMorgan Equity Premium Income ETF only generated a total return of -3.5% as income from call premiums and ELNs offset stock losses.
However, beginning at the start of 2023, simply investing in the S&P 500 or Nasdaq-100 without covered calls would have been a better strategy.
^NDX data by YCharts
Recently, mega-cap growth has driven broad indexes to new highs. Suppose a fund sells covered calls on popular stocks such as: NVIDIA or Meta PlatformOtherwise, they would have missed out on huge profits.
Still, these two JPMorgan ETFs could be good options for investors who want to keep their capital working in the markets but also want guaranteed passive income and protection from downside risk.
Yields vary depending on which contracts actively managed funds invest in, but the Equity Premium Income ETF has a historical yield of 7.6%, while the Nasdaq Equity Premium Income ETF has a historical yield of 9.3%. Call premiums on growth stocks tend to be higher due to the upside potential, which is why growth-focused Nasdaq products have higher yields than S&P 500 products.
Another benefit is that income is distributed monthly, as opposed to quarterly dividends, making both ETFs frequent and significant sources of passive income. Expense ratios for both funds are just 0.35%, a great price for an actively managed and fairly complex product.
A dividend king with room to grow
If the ETF route isn’t your preference or you don’t want to cap your gains, investing in solid dividend stocks is another option worth considering. Walmart is a dividend king, having increased its dividend for 51 consecutive years. Though it yields just 1.3%, there’s reason to believe Walmart could be on track to make even more substantial dividend increases in the future.
Walmart expects adjusted earnings per share (EPS) to grow at least 4% and net sales to grow at least 6% in fiscal 2025. Despite the pandemic and supply chain challenges, Walmart has grown sales by 26.9% and diluted EPS by 57.9% over the past five years.
Walmart has been investing heavily in recent years, spending more than $20 billion on capital equipment in the past 12 months, nearly double what it spent before the pandemic.
WMT Capital Expenditures (TTM) data from YCharts
Walmart has been expanding its product mix to better align with consumer preferences and create value for customers. The company has been carrying out extensive store renovations and building new stores under its “Store of the Future” concept. In January, Walmart announced plans to remodel 650 stores over the next 12 months. The company said in its recent fiscal 2025 first quarter earnings call that it expects to complete 900 store renovations this year.
Walmart has invested in curbside pickup, Walmart+ and Walmart+InHome, which are out-of-store options that allow Walmart to offer convenience to customers and compete with other retailers, especially Amazon).
These investments came at a high cost, but the long-term benefits have yet to be reflected in Walmart’s profits, suggesting that revenue growth and dividend hikes could accelerate in the future. And with a payout ratio of just 33%, Walmart has plenty of room to increase its dividend.
Get creative with ETFs and dividend stocks
Adding new savings to a stock portfolio on a regular basis and investing regardless of market trends is a great way to compound your wealth over time. These two covered call-focused funds can generate more passive income than many dividend stocks and have the potential to outperform broader benchmarks when markets cool off.
But long-term investors might prefer Walmart Inc., the industry’s leading dividend king. Though it offers a low yield, the company has a clear path to compounding earnings over the long term.
Perhaps the best approach is to combine ETFs and dividend stocks to boost passive income and provide diversification. In today’s era of low-cost funds and little to no trading fees on most brokerage accounts, investors can get creative and build a portfolio that fits their risk tolerance and interests and helps them reach their financial goals.
John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and communications at Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Daniel Folber has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Meta Platforms, Microsoft, NVIDIA, and Walmart. The Motley Fool recommends long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
