When considering avenues for generating passive income, investors are presented with a diverse array of options including individual stocks and exchange-traded funds (ETFs). Among the favored choices for income-seeking individuals are the telecom giant AT&T (NYSE: T) and the JPMorgan Nasdaq Equity Premium Income ETF (NASDAQ: JEPQ), a derivative income vehicle.
While both these options boast appealing yields, they diverge in their income generation approaches, potential for capital appreciation, and underlying risk factors. Here is a detailed comparison of these prominent passive income vehicles.
Image Source: Getty Images.
AT&T: A telecom giant with an enticing yield
AT&T, a renowned telecommunications entity, has been a long-standing favorite among income-focused investors. The company’s operational model, encompassing wireless services and broadband, churns out substantial free cash flows that bolster its impressive dividend yield.
Currently, AT&T offers a dividend yield of approximately 6.3%, positioning it as one of the highest-yielding equities in the S&P 500.
Nevertheless, AT&T’s recent performance has been a mixed bag. The company is grappling with fierce competition in the wireless sector, substantial debt burdens from acquisitions, and the imperative need to invest in 5G infrastructure to stay competitive.
Furthermore, the looming threat of disruption in the telecom industry poses a considerable risk that investors should factor into their assessments.
While the high dividend yield offered by AT&T is enticing, it is essential for investors to weigh the company’s growth prospects and the sustainability of its dividend payouts.
At present, the company’s payout ratio, indicating the proportion of earnings distributed as dividends, hovers around 60%, a figure that, while not exorbitant for an S&P 500 stock, leans towards the higher end for a blue-chip equity. Any setbacks in its core operations could strain its dividend distribution.
JPMorgan Nasdaq Equity Premium Income ETF: An Innovative Approach to Income Generation
The JPMorgan Nasdaq Equity Premium Income ETF operates as an actively managed ETF striving to generate monthly income by merging exposure to top-notch, large-cap stocks with an out-of-the-money call writing options strategy.
The fund invests in a portfolio consisting of 97 stocks from the Nasdaq-100 Index and vends call options on these holdings to generate additional income.
By vending call options, the fund garners premiums that can augment its yield. At present, the fund proffers a distribution yield of around 8.8%, notably higher than the yield tendered by most dividend-paying stocks.
Nonetheless, it is crucial to recognize that the fund’s distributions encompass dividends and options premiums, with the latter lacking a guarantee due to the mechanistics of the underlying strategy.
One of the prominent merits of this actively managed fund is its diversification. By investing in a cluster of significant stocks from the Nasdaq-100, the fund furnishes exposure to some of the most groundbreaking and growth-oriented companies globally, such as Microsoft, Nvidia, and Apple.
This diversification aids in alleviating the risks linked with investing in singular stocks.
Nonetheless, it is vital for investors to note that the fund’s options strategy may constrain its potential for capital appreciation.
Deciding Between Passive Income Opportunities
AT&T presents a high dividend yield and prospects for moderate capital appreciation in the foreseeable future. Conversely, the JPMorgan Nasdaq Equity Premium Income ETF furnishes a diversified path to income generation, amalgamating exposure to top-tier stocks with an options strategy to fortify yield.
All in all, the JPMorgan Nasdaq Equity Premium Income ETF arguably emerges as the favorable choice presently owing to its diversified portfolio, elevated yield, and exposure to some of the most pioneering tech entities worldwide.
Is Investing $1,000 in AT&T Right Now a Good Move?
Prior to engaging in stock purchases of AT&T, it is prudent to consider the following:
The Motley Fool Stock Advisor analyst team recently pinpointed what they deem as the 10 best stocks for investors to purchase now… and AT&T didn’t make the cut. The 10 stocks highlighted could potentially deliver substantial returns in the upcoming years.
Contemplate when Nvidia featured on this list on April 15, 2005… if you allocated $1,000 at the time of our recommendation, you’d possess $802,591!*
Stock Advisor equips investors with an easy-to-follow roadmap to success, encompassing counsel on constructing a portfolio, regular updates from analysts, and two fresh stock picks each month. The Stock Advisor service has surged more than fourfold the return of S&P 500 since 2002*.
*Stock Advisor returns as of June 10, 2024
George Budwell has positions in AT&T and Apple. The Motley Fool has positions in and recommends Apple, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
