QYLD: This ETF yielding 12.68% is a dream income

In 2023, I still buy the Global X NASDAQ 100 Covered Call ETF (NASDAQ:QYLD) for my income-producing portfolio. QYLD is an income-oriented ETF that distributes large amounts of income by writing covered call options against its portfolio, which caps most of the upside potential. Before investing in QYLD, define your investment objectives and do a good due diligence to determine if QYLD meets your needs. For me, QYLD fits into an overall revenue generation strategy that I have built. I plan to hold my shares of QYLD for decades and reinvest each distribution to benefit from the compounding powers. Some people would disagree with this premise, but the stock price fluctuation or the capping of the upside potential does not concern me. Investing doesn’t have to be an all-or-nothing premise; it is not necessary to invest every dollar in a maximum return vehicle. Some investors build hybrid strategies, and my personal strategy has an income component. I recognize the limitations of QYLD and accept that it does not generate capital appreciation comparable to that of an index fund. The capital I put to work in QYLD I never plan to withdraw unless my investment thesis changes, and I will continue to combine distributions into an ever-growing stream of income.

My mindset on QYLD as an investment

Every day when you log into your brokerage account, you see an account value. Individual positions fluctuate, and at any time an investment can be in the black or in the red. When you’re a business owner, you don’t have the value of the business in front of you every day; all that matters is the net profit and the money distributed in your pocket. Everyone’s definition of a good investment is an opinion that can vary from person to person. Imagine investing $25,000 in a business just over 9 years ago. During this time, she has generated $21,440 in personal income and is expected to generate $2,150 throughout 2023. Someone contacted you and offered $16,999 for this business today. Would it be a good investment? This answer will be different for each person, but for me, I would consider this a good investment because I still own the income-generating asset, and if I sell, I have generated 85.76% of my initial investment in distributed income over that period, and the combination of revenue and sale would earn me 53.72%. If I did not sell, I would continue to receive the income, and the price of the asset would fluctuate, but the income would continue to flow into my account, and there could be a chance that the asset would be more valuable at the time. ‘coming.

The hypothetical situation I described above is based on viewing and treating QYLD as a business. QYLD’s inception date was 11/12/13, and it hit the market at $25 per share. If you check QYLD’s distribution history, which can be found on the Global X site (Click here), you will see that since its inception, QYLD has generated $21.44 in dividend income. QYLD has never missed a monthly payment in the last 109 months and has solidified an impressive track record that validates their method of generating income in my opinion. Below is a chart I constructed based on monthly dividends.

Hypothetically, if you had purchased 1,000 shares of QYLD initially, that would have been an investment of $25,000. If you had taken the cash dividends, QYLD would have paid out $21,440 in dividends, or 85.76% of the original investment. You could sell the investment right now for $16,999, which would represent a total investment value of $38,430. When the initial $25,000 is deducted, you will end up with a profit of $13,430 or 53.72%. Over the past 9 years, the average annual income has been $2.36 per share, which means that this investment would have generated, on average, $2,363.26 per year. The past is not a guaranteed indication of what will happen in the future, but if QYLD continued to generate an average income of $2,363.26 per year, you would generate an additional income of $21,269.35 over the next 9 years. Even if the stock went to $14 and your initial basis was worth $14,000 in 9 years, you would have earned $42,538.71 in total income over the 18 year period.

If your goal is to allocate capital to generate income, in my opinion, this would be a solid investment. The most important thing with QYLD is recognizing it for what it is, a revenue-generating machine. There has been a minimal period since its inception where QYLD has exceeded its starting price of $25, but that doesn’t mean it can’t fulfill its primary goal of generating income and becoming a net positive investment over time. time.

My examples were if you had taken the cash dividends instead of reinvesting them. What would have happened if you had reinvested the dividends instead of collecting them? Based on a tool that shows the growth of $10,000 with dividends reinvested, the original investment of $10,000 would have purchased 399.36 shares. Over the years, the reinvestment of dividends would have increased the share base by 586.41 shares for a total of 985.77 shares. Today, the total investment would be worth $16,752.78 for a total return of 67.48%. While an average rate of return of 5.79% over 9.17 years is significantly lower than the average return of an S&P index fund, look at how the projected annual income in the future would have changed. The average annual dividend per share over the past 9 years for QYLD has been $2.36. The projected income on the initial lot of 399.36 shares would have been $942.50. Today, the 985.77 shares are expected to produce $2,326 in annual dividend income, as the additional 586.41 shares raised added $1,384 in projected annual dividend income. If you wanted to, you could sell your initial investment of $10,000 today, which would be 588.58 shares and you would still have 397.2 shares left producing $937.40 in projected annual income. You can also continue to benefit from compounding powers by reinvesting dividends and increasing your annualized income stream.

Conclusion

I guess many investors who dislike QYLD base their opinion on capital erosion. QYLD needs to be looked at from a different angle and accepted for what it is, a hedged call fund that can never trade above $25 but generates large amounts of ongoing income, in my opinion. On the income side of my portfolio, I’m completely content with allocating capital on the assumption that I’ll never touch it. QYLD has paid 109 months of continuous dividends and built a track record that I am comfortable with. I would have been happy with the results for the previous 9 years regardless of whether I took the cash income along the way or reinvested the dividends. Since QYLD is based on writing covered call options, it is a strategy that can work indefinitely and has already proven itself in difficult economic conditions. I plan to add to my position, reinvest the dividends, and work my way into a gigantic stream of income down the road. This strategy may not be suitable for everyone, and it only represents part of my overall investment mix. Personally, I want an income stream to offset or pay for my lifestyle in the future before I dip into assets in retirement.