Are dividend ETFs like JEPI, DVY, FALN, and VYM worth it?

Dividend ETFs have become popular assets among income-focused investors because of the regular income they provide. Many big funds like the iShares Select Dividend ETF (DVY) and the Schwab US Dividend Equity ETF (SCHD) have attracted over $17 billion and $54 billion in assets. 

The JPMorgan Equity Premium Income ETF (JEPI), a newly launched fund, has attracted over $33 billion in assets. Also, the iShares Fallen Angels Bond ETF (FALN) has gained over $1.6 billion.

Demand for dividend funds is rising

Other assets that have become highly popular are Real Estate Investment Trusts (REITs), MLPs like Energy Transfer and Enterprise Product Partners (EPD). Younger investors have also moved to some riskier cryptocurrencies like Ethena’s USDe stablecoin that yields over 34%.

These funds and dividend stocks are loved because they pay a regular dividend either monthly or each quarter. 

However, a closer look shows that most of these funds are not the best places to pack your money. In the first place, government bonds are now having a better yield than most of these funds. 

With the yield curve inversion, a 3-month note is yielding 5.3% while the 10-year has a 4.4% return. As such, if you invest $100,000 in the 10-year, you will get about $4,400 annually or about $360 each month. 

To be sure: there are two main risks of investing in government bonds. The Fed could turn dovish, a move that will lower its yield. Also, unlike dividend ETFs, government bonds lack growth. 

The JEPI ETF has a yield of about 7.9% at the time of writing. Investing $100,000 in it would give a return of about $7,900 a year. However, in the past, the fund’s payouts have differed widely while the total return in the past 12 months stood at about 11%. 

The iShares Select Dividend ETF (DVY) yields 3.73% while the VYM yields 2.88%. Their total return in the past 12 months was 9.78% and 15.47%, respectively. 

S&P 500 and Nasdaq 100 funds are better alternatives

While these funds have a stronger yield, the reality is that investing in generic investments like the S&P 500 and the Nasdaq 100 indices has been a better investment. In the past 12 months, the Vanguard S&P 500 ETF (VOO) and the Invesco QQQ (QQQ) fund have risen by over 25%. 

The same trend has happened in the longer timeframe. As shown above, the two funds have returned 33% and 41%, respectively in the past three years. All the dividend-focused funds have returned a lower figure than that. 

This performance happens because most dividend-focused funds allocate their funds to value companies with slow growth. They lack companies in forward-looking companies in industries like artificial intelligence like tech. 

Therefore, I believe that investors should stay away from dividend funds like JEPI, DVY, FALN, and VYM and instead focus on funds with a stronger total return metric.