When it comes to generating passive income, investors have a wide range of options to choose from, including individual stocks and exchange-traded funds (ETFs). Two popular choices for income-seeking investors are the telecom stalwart AT&T (T 0.38%) and JPMorgan Nasdaq Equity Premium Income ETF (JEPQ 0.29%), a derivative income vehicle.
While both options offer attractive yields, they differ in their approach to generating income, their potential for capital appreciation, and underlying risk profile. Here is a head-to-head comparison of these two popular passive income vehicles.
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AT&T: A telecom giant with a mouthwatering yield
AT&T is a well-known telecommunications company that has been a favorite among income investors for decades. The company's business model, which includes wireless services and broadband, generates substantial free cash flows that support its high dividend yield.
At present, AT&T offers a dividend yield of around 6.3%, making it one of the highest-yielding stocks in the S&P 500.
However, AT&T's recent performance has been mixed. The company has been dealing with intense competition in the wireless industry, heavy debt loads from its acquisitions, and the need to invest in 5G infrastructure to keep pace with the field.
Topping it off, the potential for disruption in the telecom industry is a serious risk factor investors should keep in mind.
While AT&T's high dividend yield is attractive, investors should consider the company's growth prospects and the sustainability of its dividend payments.
The company's payout ratio, which measures the proportion of earnings paid out as dividends, is currently hovering around 60%.
That's not outlandish for a S&P 500 stock, but it is on the high side for a blue-chip equit. Any setbacks in its core business could put pressure on its dividend.
JPMorgan Nasdaq Equity Premium Income ETF: A novel approach to income generation
The JPMorgan Nasdaq Equity Premium Income ETF is an actively managed ETF that aims to generate monthly income by combining exposure to high-quality, large-cap stocks with an out-of-the-money call writing options strategy.
The fund invests in a portfolio of cosisting of 97 stocks from the Nasdaq-100 Index and sells call options on these holdings to generate additional income.
By selling call options, the fund earns premiums that can enhance its yield. At present, the fund offers a distribution yield of around 8.8%, which is significantly higher than the yield offered by most dividend-paying stocks.
However, it's important to note that the fund's distributions include both dividends and options premiums, and the latter is not guaranteed due to the mechanics of the underlying strategy.
One of the key advantages of this actively managed fund is its diversification. By investing in a basket of large-cap stocks from the Nasdaq-100, the fund provides exposure to some of the most innovative and growth-oriented companies in the world, such as Microsoft, Nvidia, and Apple.
This diversification can help mitigate the risks associated with investing in individual stocks.
However, investors should be aware that the fund's options strategy can limit its potential for capital appreciation.
When the fund sells call options, it agrees to sell its underlying holdings at a predetermined price, which can cap the fund's upside potential if the stocks appreciate significantly.
Which passive income play is the better buy?
AT&T offers a high dividend yield and the potential for modest capital appreciation in the years ahead. On the other hand, the JPMorgan Nasdaq Equity Premium Income ETF provides a diversified approach to income generation, combining exposure to high-quality stocks with an options strategy to enhance yield.
All things considered, the JPMorgan Nasdaq Equity Premium Income ETF is arguably the better buy right now due to its diversified portfolio, higher yield, and exposure to some of the most innovative tech companies on the planet.
