Investors looking to build a high-yield portfolio to generate passive income or reinvest dividends to compound returns might want to consider these three choices: The JPMorgan Equity Premium Income ETF (JEPI -0.68%), the Global X MLP ETF (MLPA -0.08%) and UPS (UPS -0.20%). Here's why.
JPMorgan Equity Premium ETF (Dividend yield: 7.1%)
There's no shortage of high-yield exchange-traded funds (ETFs) to invest in, but three things make this ETF particularly attractive. First, its strategy of allocating up to 80% of assets in U.S. equities and up to 20% in financial instruments that sell S&P 500 out-of-the-money call options isn't easy for retail investors to replicate. The latter strategy (discussed in more detail here for those interested) makes money when the S&P 500 doesn't rise strongly in the month.
Second, the options strategy will generate monthly income for investors, even when equities fall. This will help reduce the downside volatility in the ETF's performance overall.
Third, unlike most equities-focused ETFs, the allocation to equities isn't based on dividend yield. As such, the manager isn't forced to buy stocks bunched in high-yield sectors like energy or real estate investment trusts that could underperform for lengthy periods just because they are chasing yield.
The Global X MLP ETF (Dividend yield: 7.4%)
One of the overarching investment themes of 2024 is the growing recognition that the clean energy revolution will take place at a slower pace than many previously thought. Investors are warming to the idea that energy sources like natural gas and nuclear have a more significant role than was once thought.
You can pick stocks to play the theme, or buy an ETF like this Global X offering. The "MLP" stands for Master Limited Partnerships. It's not a secret society -- it is limited partnerships that trade publicly as equities. They do not pay corporate taxes and generally focus on resource transportation industries.
In this case, the Global X MLP ETF invests in midstream pipelines with long-term contracts that ensure a stream of income on a multi-decade basis. The ETF's top holdings are in natural gas transportation and storage companies like Energy Transfer, Enterprise Products Partners, and MPLX.
Natural gas pipeline and storage MLPs do offer stable long-term income, but investors were previously concerned about their long-term future, given the movement toward clean energy. While some doubts remain, natural gas is likely to be a vital part of the energy mix for many decades to come, and the prodigious cash flows and dividends that MLPs will generate in the meantime make them valuable investments for income-seeking investors.
UPS (Dividend yield: 4.9%)
The package delivery giant continues to deal with some challenging end-market conditions, but the recent results helped reassure investors. While its revenue per piece is still declining year over year (down 1.7% overall in the third quarter), its cost per piece declined even more (down 4.1%) , and its overall delivery volume rose by 5.4%.
The end result of these moving pieces was a revenue increase of 5.6% and an operating margin expansion from 7.7% in Q3 2023 to 8.9% in Q3 2024. Operating profit increased by almost 23%.
While the volume growth came with lower revenue per piece, it's a sign that the industry is slowly working its way through the overcapacity that characterized it through 2023 and 2024. That will be good for pricing in the future, and UPS will continue to reduce capacity and make productivity-enhancing investments (automation, smart facilities, cutting jobs, and rationalizing locations) that will help margins.
Image source: Getty Images.
Meeting its full-year guidance isn't a given. Its free cash flow (FCF) of $5.1 billion won't cover its dividend payment of $5.4 billion. This is likely to be a trough year in earnings, and UPS should generate more profits and cash flow in future years as most of its metrics are moving in the right direction.
