QYLD Dividends for Passive Income

Why QYLD has become part of my Passive Income Portfolio as I work toward $100,000/year in Passive Income!

QYLD Dividends for Passive Income
Photo by Mayank Dhanawade / Unsplash

y quest continues to earn $100,000 passive income in a year. Supporting my strategy is $QYLD, a monthly dividend producing ETF that uses a Covered Call strategy by owning and selling Nasdaq 100 stocks. It’s not one for the faint of heart, but it fits with my passive income strategy and I went long.

There are two things that jump out at me risk wise.

For my readers, I've written covered calls before, and they're a great strategy to amp up your returns. The drawback is that you might get your shares 'called away' and then end up losing out on more growth. It's extremely harsh for small investors - like me - that don't have billion-dollar portfolios and own 1000's of shares of $MSFT or $AAPL. Every 100 shares that get called away from me hurts me in the end, so I've stopped doing that strategy. It makes sense to do it in an ETF that holds billions of dollars in these tech giants.

There are two things that jump out at me risk-wise. The high price and the possibility of a market correction. Price-wise, it's trading near its 52 week high around $23.00. A bit rich but with a small share purchase I can mitigate my risk.

There's a bunch of resistance it broke through (see red lines on chart) and it's been climbing higher. I call this the Biden Transition effect. Everyone seems to feel better with Trump about to leave the Presidency. Of course, the next support, should it sell-off, is around $21.25. Plus it has a very thin volume (676k), so getting in and out can be hard in market turmoil.

QYLD has a reasonable expense ratio of 0.60%. I guess that's ok considering the strategy it employs to make us dividends. The good news is that it has a low Beta, it's at 0.69. Despite selling covered calls, it's less volatile than the overall market and that fits my strategy nicely.

Of course, this strategy will start sucking some wind if the markets sell-off and enter a Bear Market. Still, there are always trending stocks and you can always write covered calls on them.

Here's the great news, QYLD generates is $2.75 dividends per share in a year. A modest purchase of 100 shares will net you $275 a year. At the average price of $23 a share, an initial investment would cost you $2,300 and that's completely do-able for people with IRAs.

What I like about QYLD is its monthly payout. That's nice for people that are looking for monthly income and to do dollar-cost averaging. You build up a portfolio quicker this way!

My QYLD Strategy

It's simple, I've gone long a small position in my Roth IRA and plan on reinvesting the dividends. It roughly generates 0.22 a share per month and on 100 shares that's $22 and will net me just under 1 share of QYLD. Keep doing this over the next 12 months and I should see passive income greater than $275.

Even if the prices dip, and they will at some point, I would be able to buy more shares at lower prices. Of course, the risk is that dividend payout will decrease but the low beta helps me there as well.

Updated for 2024

Since late 2020, I have been an investor in the covered call ETF, QYLD, and I remain long. This fund has been a cornerstone in my portfolio, primarily due to its impressive 12% dividend yield, aligning seamlessly with my goal of building a stable source of passive income. The best part of owning QYLD for all these years is the monthly payouts and the generous $2.05 per share as I move toward a $100,000 passive income stream.

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Understanding QYLD and Its Dividend Yield

QYLD, the Global X NASDAQ-100 Covered Call ETF, operates by owning stocks in the NASDAQ-100 Index and selling monthly covered call options on the index. This strategy provides income from option premiums, contributing to its high dividend yield. The ETF's approach balances income generation with risk management, as the covered calls provide a cushion against mild market downturns while still allowing for participation in some of the market’s upside.

Performance Analysis

Since my investment in 2020, QYLD has displayed a commendable performance, characterized by its consistent dividend payouts. Its payout ratio, a key indicator of dividend sustainability, has remained stable, ensuring a reliable income stream. While the fund may not have shown significant capital appreciation due to its income-focused strategy, the steady dividends have been a core attraction.

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QYLD vs. Dividend Traps

A dividend trap often refers to a high-yielding stock whose dividends are unsustainable, typically leading to reduced payouts or financial distress. QYLD, however, stands apart due to its strategic income-generation method. The consistent income from covered call premiums underlines the sustainability of its dividends. Moreover, the quality of the underlying assets – stocks in the NASDAQ-100 – adds a layer of security, as these are generally well-established companies.

Long-Term Viability and Personal Investment Rationale

QYLD’s strategy has demonstrated resilience in various market conditions, including the volatile phases since 2020. The ETF's ability to generate income irrespective of market direction aligns with my long-term investment philosophy focused on passive income generation. While market fluctuations and interest rate changes can impact performance, QYLD’s core strategy of income generation through option premiums remains robust, supporting its long-term viability.

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QYLD has a strong seasonality component too! My returns are doing well since I bought it in December 2020.

End Notes

In summary, QYLD has proven to be a solid component in my investment portfolio, primarily due to its consistent and high dividend yield. Its strategic approach to income generation, stability in payouts, and resilience in diverse market conditions underscore its distinction from typical dividend traps. As a tool for passive income, QYLD continues to align with my investment objectives, reinforcing my decision to hold onto it.

Disclosure: Still Long

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