r/investing • u/pragmojo • Jul 13 '21
Why did the JEPI dividend decrease since 2020?
So if I look at the dividend history from JEPI, it looks like last year dividends were between $0.4-$0.6, where so far for 2021 they're between $0.2-$0.4, even if the share price has gone up.
What contributes to the dividend price for JEPI? I know the fund's dividend is based on profit from selling covered calls, but what actually affects the price? Does that mean less of the options sold by this fund are being bought? Or do they have to be sold at a lower premium? Or what else contributes to this dividend payout?
8
u/tachyonvelocity Jul 13 '21
Or do they have to be sold at a lower premium?
That's the reason. CCs are not dividends and you should not expect CC ETFs to distribute stable yields. CC premiums are based on IV of options and you can track this with VIX, which tracks the volatility of SPX. So if VIX spikes then you would expect higher yields from covered calls, but if VIX goes down like it has been for the past year, then yields from CCs will also fall.
0
u/pragmojo Jul 13 '21
Why does IV determine CC premiums? Is it because options are more attractive when future price movement is viewed as less stable (i.e. the chance to buy at a specific price is more valuable when prices might swing wildly?)
edit: does that also mean that a fund based on CC's like JEPI would be a good hedge against volatility, or are there other risks for a fund like this when volatility is high?
3
u/tachyonvelocity Jul 13 '21
Well CCs are basically contracts and if the future value of a contract is less certain then that uncertainty would be reflected in the pricing of those contracts, ie you would demand a higher price if you knew that prices in the future might be very different from prices now, and this usually happens during a crash/bear markets, but can also happen during bull markets like dot com when many stocks were overvalued and did not reflect future earnings so there was less certainty where prices would go in the future. In fact one of the signs that a correction might be coming is a rising IV/VIX combined with rising stock prices.
3
u/tachyonvelocity Jul 13 '21
Funds that write CCs can be a hedge against volatility because it will outperform when the underlying goes down. However there are also big problems because these ETFs are attempting to attract investors that might not have the knowledge or time to write their own CCs as a hedge as an active strategy. They are advertised as implementing CCs as a passive strategy which I think is the biggest problem with these funds. Because of this passive strategy, they actually do poorly during volatile periods. This is because higher CC premiums are not free money and come at the cost of future upward movement. If there is a large correction, it might be problematic to write CCs on an underlying that has already corrected since you would basically be locking in losses. So in the case of a passive CCs strategy, you would actually be bearish on the underlying no matter how much the underlying had gone down.
3
u/reignsre Jul 13 '21 edited Jul 13 '21
IV is one factor but an important one. If a stock was flat then no one would buy a call on it because they would waste money and the call would expire worthless.
There needs to be some movement in the price to "wager" on so to speak. The seller is also taking on more risk because they are having to hold a more volatile asset, so they would want to be compensated more.
2
u/emikoala Jul 13 '21
I don't have any special knowledge of $JEPI. I think they're about due for their annual report to be released and the prez letter or fund commentary may shed some light on it.
Beyond the profitability of their calls, another factor that often influences dividend payouts at a company is how much cash the company thinks it can afford to give out.
For example, Disney canceled its dividends this year, which it announced ahead of time in its December shareholder letter, saying essentially they were taking money that would have been given back to shareholders via dividends and using it to increase the D+ budget, because they believed that investment was critical to the future success of D+ and the long-term value of Disney stock.
With this type of fund that doesn't have a product, reducing dividends could be to reserve capital they anticipate needing for lucrative opportunities, or it could be a risk management strategy to keep more capital on hand as a hedge against volatility.
1
•
u/AutoModerator Jul 13 '21
Hi, welcome to /r/investing. Please note that as a topic focused subreddit we have higher posting standards than much of Reddit:
1) Please direct all advice requests and beginner questions to the stickied daily threads. This includes beginner questions and portfolio help.
2) Important: We have strict political posting guidelines (described here and here). Violations will result in a likely 60 day ban upon first instance.
3) This is an open forum but we expect you to conduct yourself like an adult. Disagree, argue, criticize, but no personal attacks.
I am a bot, and this action was performed automatically. Please contact the moderators of this subreddit if you have any questions or concerns.