Hello everyone, I hope you’re all enjoying this beautiful spring weather. In Texas we only get so many days of this before the temperature turns up and stays there. If you’re in this region you know what I mean and it doesn’t cool down again until next winter.
In any case, I wanted to write briefly today about using covered call ETF’s to generate a higher income than my high yield savings account. Now, I realize there are several safer places to put my cash and up to last week that was my preferred approach. Since the yield on most HYSA’s, Money Market’s, or even Treasuries are all compelling right now at around 5%.
But you may recall a recent post where I discussed the pro’s and con’s to covered call ETF’s so I’m going to push forward here and see what happens. Now, I know what you’re thinking. DON’T DO IT!
It’s true, the risk may never turn to reward but read on and I’ll explain…
History
Before I proceed with showing you why I’m taking this step I think it’s important to provide a little context. First, I’m an options trader, not a very good one I’ll admit, but I trade options none the less. As such, I enjoy the income options provide and for years I’ve waded into just about every income producing options strategy in existence.
Some went well, others failed miserably, but virtually all of them provided a cash inflow. Covered call ETF’s automate this process. I buy the shares, they trade the options, I avoid the management, and bingo bango, income is generated.
Covered call ETF’s carry unique risks but chief among them is the unlimited downside and little to no capital appreciation. The hope, is that these covered call ETF’s can maintain their principle balance while also providing the income. Not an easy feat, but if they can then I’ll be rewarded with a much more attractive yield.
I’ve held covered call ETF’s for the past 2 years and the outcome has been stellar, in my opinion. For example, JEPI has returned me, to date, $320 in cash flow and $29.94 of capital appreciation. Maybe I was lucky but given the sharp decline JEPI experienced in 2022 I believe it’s more than possible. I guess I’ll see soon enough.
Account Goal
Generate enough income to pay for any vacation I want. That’s it, I want to finance that expense in it’s entirety. Ideally, I want to earn enough to pay for a vacation and still grow the account. Additionally, if the plan works out, I could be enjoying beautiful blue water beaches in as little as 3 years. I probably won’t however because I want the account to grow, but I’ll explain that shortly.
I could just dump the entire savings into my Robinhood account but I cannot bring myself to do this with these assets. With JEPI and later JEPQ, I was able to maintain my principal balance largely because I continued to lower my cost basis. If, or more specifically, when these assets begin to fall I want the option to do the same thing here. Sure, I could begin earning enough this year but I’m going to attempt the safer approach and DCA in as the share price falls.
Covered Call ETF’s Plan
The plan isn’t all that complicated. I’m going to dollar cost average into each of these assets until I’ve achieved an income that provides enough to take a vacation each year. At current, the vacation’s I prefer cost around $2000 per person all in. That cost pays for the airfare, accommodations, food, & minor expenses along the way. As time or account growth allow, I’ll want to increase that amount to enjoy even nicer accommodations or take additional trips.
In any case, here is the plan.
- Invest $2,500 into 5 monthly yielding covered call ETF’s
- Contribute $50 per week
- DCA as share price falls or into the next pay date
To explain number 3 briefly, I’ll aim to DCA first into those assets that have experienced a share price decline. Should none of them decline each week by a meaningful amount, I’ll DCA into the asset with the next upcoming dividend. Moreover, if I can DCA into a decliner and it’s the next payer that’s just icing on the cake.
Covered Call ETF’s Preferred List
I’ve spent the last several weeks determining my preferred list of income producing assets. Let me tell you, the number of assets in existence is staggering. Apparently, income production is highly sought after. Who knew? Regardless, I faced a few barriers here because many of the assets I’d hoped to include, Robinhood doesn’t support. Namely, closed end funds (CEF), such as the offerings from Eaton Vance. All of which, I would prefer to hold here to minimize downside volatility.
These closed end funds, in my own experience, do a great job of providing a higher yield while also maintaining their value. I definitely don’t want any TSLY or CONY in this portfolio. The share price on those falls faster than any level of income could maintain. Therefore I had to settle on the following assets for this account with hope that someday Robinhood will allow for CEF’s as well.
In order of dividend ex-dates;
- ISPY – 1st of Month
- JEPI – 1st of Month
- JEPQ – 1st of Month
- SPYI – 20th of Month
- FEPI – 24th of Month
The only other requirement I had was that each asset pay monthly dividends. However, I’m not fully convinced I’ll keep this approach long term. Eventually, I’ll probably hold at least a few assets that pay dividends quarterly but also perform better when the market falls.
Income Production
With everything shared and my plan fully explained now I want to show you why I’m doing this in the first place. The results are terrific but please know I’m putting a good deal of faith that these assets will not fail on their promise to produce an above average income. Additionally, the following is assuming the dividends never change, which they certainly will. Some months will be higher and some lower.
Also, I want the account to continue growing. To assist, I won’t begin taking withdraws until half of the monthly income is near my $2,000 dollar vacation cost. This will take longer but it’s also possible in the future I can commit more capital to speed the process up. Just another $100 per month would cut my timeline down to 5 years and $200 more takes it to 4 years.
Lastly, the graph below assumes a 2% per year average share price decline. The results would be different if the share price were to increase or if I committed additional capital. I’m also not considering taxes so that hurts but hey, I have to start somewhere and I think this is acceptable.
Starting Balance – $2,500
Year | Contribution / (Withdraw) | Income | Principal |
2024 | $2,400 | $460.20 | $4,970.74 |
2025 | $2,400 | $824.09 | $7,910.01 |
2026 | $2,400 | $1,254.19 | $11,288.53 |
2027 | $2,400 | $1,763.64 | $15,177.55 |
2028 | $2,400 | $2,369.39 | $19,690.18 |
2029 | $2,400 | $3,084.59 | $24,883.61 |
2030 | ($1,832.31) | $3,664.63 | $26,578.75 |
2031 | ($1,989.63) | $3,979.27 | $28,267.68 |
2032 | ($2,152.97) | $4,305.95 | $30,153.63 |
2033 | ($2,345.86) | $4,691.73 | $32,224.40 |
Closing Thoughts
As you’ll notice, starting in year 2030 I would no longer be contributing money to this portfolio. The work will be done and the reward will begin to flow. If I think of it like an ultra cheap car payment, $200 per month for 6 years isn’t all that much. Once complete, the rewards could last for years to come. I could also, at any time, substitute one or more of the assets. Possibly an asset with a higher yield or maybe something safer with a lower yield. Only time will tell.
One thing is crystal clear however, I want this portfolio to provide an income. Right now, it’s to pay for traveling. In the future it may be to pay the electric bill or even a costly flight simulator. Who knows, I may also take up under water basket weaving and will need equipment. The possibilities are truly endless.
Finally, if I extrapolate this out into year 20, when I’ll likely be retiring. The results are absolutely shocking. Assuming I continue to withdraw half of the money every year after 2030, I’d have the following in year 20.
Year | Contribution / Withdraw | Income | Principal |
2043 | ($6,056.73) | $12,113.46 | $70,270.00 |
God bless,
Jeff