In my recent blog post, Is SCHD Losing Its Shine? Weaknesses Every Investor Should Know, I examined the challenges facing SCHD and its declining appeal as a dividend ETF. Previously, I highlighted SCHD as one of the best dividend income funds for retirement and compared it to JEPI in my post on income strategies. Building on these analyses, today’s post explores an even more compelling alternative to SCHD—combining VFLO and JEPI for higher yields and superior growth.
What?
The Schwab U.S. Dividend Equity ETF (SCHD) has long been a gold standard for high-yield ETF investors, boasting low costs, tax efficiency, and consistent dividend growth. However, recent trends reveal that SCHD's growth prospects have declined significantly, with income growth potential dropping from 13%-14% to just 8%-9%. This drop is primarily due to its bi-annual rebalancing process, which has shifted its portfolio towards slower-growing companies.
So What?
To address SCHD's declining appeal, I propose a balanced portfolio combining the JPMorgan Equity Premium Income ETF (JEPI) and the VictoryShares Free Cash Flow Yield ETF (VFLO) at equal weights (50% each). This blend capitalizes on JEPI's high-income potential and stability while leveraging VFLO's strong growth orientation and free cash flow strategy.
JPMorgan Equity Premium Income ETF (JEPI)
The JPMorgan Equity Premium Income ETF (JEPI) is a standout for investors seeking stable, high income. By employing an innovative covered-call strategy, JEPI generates consistent yield while minimizing volatility. This approach makes it an attractive option for income-focused portfolios, combining dependable payouts with a relatively conservative risk profile. For a deeper exploration of JEPI's features and benefits, check out my blog post, JEPI ETF: High Income and Stability in One Fund.
VictoryShares Free Cash Flow Yield ETF (VFLO)
The VictoryShares Free Cash Flow Yield ETF (VFLO) is designed to identify companies with high free cash flow yields and robust growth potential. By prioritizing free cash flow as a core metric, VFLO offers a unique blend of growth and value. Its quarterly rebalancing ensures the portfolio consistently captures opportunities among top-performing companies. For more insights into VFLO’s strategy and performance, revisit my blog post, VFLO ETF: A Game-Changer for Growth and Value for Any Investors.
Portfolio Comparison: Sample Portfolio vs. SCHD
The backtest results comparing the proposed JEPI-VFLO Sample Portfolio (50% JEPI, 50% VFLO) and SCHD reveal key advantages for the sample portfolio:
Performance Highlights:
Higher Yield Advantage: The JEPI-VFLO sample portfolio (50% JEPI, 50% VFLO) demonstrates a clear higher yield advantage over SCHD (see the table below):
SEC 30-Day Yield: The sample portfolio delivers a yield of 4.00%, compared to SCHD's 3.53%.
TTM Yield: The trailing twelve-month yield for the sample portfolio is 4.01%, surpassing SCHD's 3.45%.
Higher Growth and Returns: The sample portfolio delivered a return of 23.94%, significantly outperforming SCHD’s 19.58% over the same period. This resulted in an end balance of $12,394 for the sample portfolio compared to $11,958 for SCHD, assuming a $10,000 starting investment.
Lower Maximum Drawdown: The maximum drawdown for the sample portfolio was -3.66%, which is smaller than SCHD’s -4.51%, demonstrating the portfolio’s ability to better weather market dips.
Superior Risk-Adjusted Metrics (Ref. the Performance Summary Table Above):
Sharpe Ratio: The sample portfolio scored 1.73, higher than SCHD's 1.48, indicating better risk-adjusted returns.
Sortino Ratio: The sample portfolio’s 4.11 versus SCHD’s 2.88 reflects its stronger downside risk management.
Now What?
For investors looking to optimize their dividend income and growth potential, the JEPI-VFLO portfolio offers a balanced and compelling alternative to SCHD. Here’s how you can take action:
Evaluate Your Investment Goals: Assess whether your focus is on higher income, long-term growth, or a mix of both. The JEPI-VFLO combination provides a higher yield and superior growth potential while maintaining balanced risk, making it suitable for investors seeking a diversified income strategy.
Start Small and Scale Gradually: If you’re currently invested in SCHD, consider gradually reallocating a portion of your portfolio to JEPI and VFLO. A phased approach allows you to test the waters while minimizing potential market timing risks.
Rebalance Regularly: Just like SCHD undergoes bi-annual rebalancing, ensure that your JEPI-VFLO portfolio is reviewed periodically to maintain the 50/50 allocation. This helps optimize returns and align with market conditions.
Consider Tax Implications: Keep in mind that JEPI distributions are taxed as ordinary income, while VFLO is more tax-efficient. Work with a tax advisor to structure your portfolio in a way that minimizes tax liabilities.
Stay Informed: Monitor market conditions and the performance of both JEPI and VFLO. Staying updated on economic and corporate trends will help you make informed decisions about maintaining or adjusting your portfolio.
Think Long-Term: While the JEPI-VFLO portfolio has shown strong performance in backtests, it’s important to remain patient and committed to a long-term strategy. Avoid reacting to short-term market fluctuations, and focus on the portfolio’s potential to deliver consistent income and growth over time.
Concluding Remarks
The JEPI-VFLO portfolio offers a powerful alternative to SCHD, combining JEPI’s income stability with VFLO’s growth potential. With higher yields, superior risk-adjusted returns, and enhanced growth prospects, it addresses the limitations of traditional dividend ETFs like SCHD. By aligning this strategy with your financial goals, you can position yourself for long-term success in an ever-changing market. Talk to your financial advisor to ensure this strategy fits your individual needs and objectives.
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