Key Points

• High dividend paying YieldMax ETFs have changed the paradigm in many investor minds about dividends for income, rather than as a leverage tool for wealth building.
• Old school investors who segregate growth and income investments as separate entities often fail to look at the bigger picture, albeit with a different set of risks involved.
• Deploying dividend compounding and other techniques used by portfolio managers for decades in a new way does not invalidate them, but should be judged by their results.
• It sounds nuts, but SoFi is giving new active invest users up to $1k in stock, see for yourself (Sponsor)

Although not the sole issuer of high dividend, covered call ETFs, YieldMax’s name has certainly become the one most associated with this niche, but expanding, ETF sector. With dividends in the double digits paying out monthly, or in some cases, weekly, the notion of dividends solely as the province of retirees seeking regular income for their golden years has been turned on its head. Many who ascribe to the FIRE (Financial Independence, Retire Early) ethos, which includes the new generation of DIY Gen-Z investors with RobinHood brokerage accounts have leaped onto the YieldMax bandwagon.

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Old school investors who have long kept growth and income securities in separate baskets have derided these new dividend investors as “financial crackheads” who fail to understand risk and investment principles. On the other hand, many of the FIRE-minded investors have effectively used their high dividends to compound their earnings and accelerate their wealth building. A look at each camp’s respective arguments has both pros and cons.

DRIP Dividend Compounding and The YieldMax Edge

The monthly or weekly frequency of YieldMax ETF dividend distributions can turbocharge a DRIP program’s dividend compounding effect, resulting in more noticeable gains in a shorter time period that with quarterly dividends.

The power of compounding is succinctly illustrated in the fable, “The King, The Commoner, and The Dividend”. 

A King wished to reward a Commoner and planned to offer him 10,000 gold coins for instant wealth. The Commoner, to the King’s surprise, asked only  for a single gold coin per month with a  dividend coin for each previous month. The King readily agrees to the seemingly trifling sum.

• Month 1: Commoner receives 1 coin
• Month 2: Commoner receives 2 coins – 1 + 1 dividend for 3 total
• Month 3: Commoner receives 3 coins – 1 + 2 dividends for 6 total. 

As the months turn to years, the dividends generate their own dividends. In a decade’s time, the Commoner becomes the wealthiest person in the realm, while the King’s fortune has been depleted. The underlying moral of the story is that the slow and steady gain is ultimately more lucrative than the big one-time score. 

Compounding dividends has often been compared to a snowball, hence thesnowball effectanalogy: If one pushes a snowball down a snowy hill, it continues to pick up snow as it rolls down, winding up to the size of a boulder by the time it reaches the base of the hill. In the same fashion, small dividend reinvestments made on a regular and consistent basis can result in a massive portfolio over time, all without the need to augment the portfolio via additional savings contributions. Of course, adding extra funds is like adding kerosene to a bonfire, and will further accelerate the growth effect.

One of the most popular ways of late to build wealth through dividend compounding among FIRE devotees is through the use of a Dividend Reinvestment Plan (DRIP). It puts dividend reinvesting on autopilot, allows for dollar cost averaging, and eschews the need to try to time the market with additional buy orders.  In fact, a DRIP program can often be deployed withlittle to zero fees, thus maximizing dividend funds for investment, as opposed to being frittered away on expenses. 

In the case of dividend generating securities, the snowball effect will usually make its presence felt after a few years, comparable to the fable. However, the effect becomes more readily apparent and exponentially more effective when the DRIP process is working on a monthly or weekly basis. 

The YieldMax ETF platform is predicated on the ETFs tracking volatile tech stocks. A short maturity  covered call option collar strategy is deployed to generate dividends from the high delta option premiums. As a result, the dividends for popular YieldMax ETFs like MSTY (which track MicroStrategy) and NVDY (which tracks Nvidia) pay out monthly. In the case of ULTY, there is a portfolio of 30 or more actively traded volatile stocks against which a mix of call and put options may be open at any given time, in addition to synthetic options. The YieldMax Ultra Option Income Strategy (ULTY) has a distribution yield of roughly 88% at the time of this writing and pays distributionsweekly. 

A DRIP program operating with dividend reinvestments annually based on quarterly payouts can take several years for the compounding effect to manifest a notable difference. However, a monthly or weekly dividend reinvestment, even in smaller increments, exponentially magnifies the compounding effect, and results can be readily acknowledged in a few months under a DRIP program. 

“Income Funds Are For Income”

Many old school investors see investing for income and investing for growth as two separate camps that should not intersect.

An experienced investor who bought some YieldMax ETFs comes from the old school of investing mindset. His purchase of YieldMax ETFs was due to the income factor. He took to Reddit to express his concerns, which included:

• Younger investors seeking monthly or weekly dividends are ignoring negative consequences and risks to collect and then reinvest those dividends for a rush not unlike the one from a hit of crack cocaine.
• He fails to see how reinvesting dividend distributions back into the same ETF is better than investing directly into the underlying stock and just riding it up for growth.
• His perspective on YieldMax ETFs is that they should be viewed as a vehicle for perpetual income, not perpetual reinvestment. 
• Most YieldMax and comparable covered-call ETFs are still too new for a comprehensive analysis as to their actual and historical risks and how they’ve weathered market trends in both the bullish and bearish directions. 
• He cautions that failure to monitor changes in distributions can lull younger investors into a false sense of security that will result in reacting too late to prevent losses.

Commoner Compounding On Steroids and The Flexibility of Dividend Income

Many younger investors appreciate high dividend ETFs as a basis for compounding dividends in a wealth building DRIP program that can switch to an income source when between gigs.

A hallmark of the digital age is enhanced speed in all matters, thanks to the number crunching power of computing. Gen-Z is often stereotyped for their impatience and desire for instant gratification, but their familiarity with technology and its speed advantages often underlies that attitude. While there is a certain level of bravado that is ubiquitous with every younger generation, not all of it is predicated on recklessness and ignorance. 

While the Reddit poster makes a valid point about holding an underlying stock for the capital appreciation gains to realize growth, there are also risks involved when those stocks take a short-term downturn.  For example, many stocks dropped precipitously in April when President Trump announced his reciprocal tariff policy, which spooked many investors who have never seen a bearish market streak. Hearing horror stories from older relatives about the 2008 subprime mortgage banking meltdown and the late 1990s dot-com bubble likely spooked many into looking for another avenue towards wealth building to achieve their FIRE agendas. 

What the older investor doesn’t see is that the Gen-Z  FIRE fan investor in YieldMax who uses a DRIP program is focused onwealth building, not capital gains, per se. As such, the DRIP program, fueled on a monthly or weekly basis, is effectively a standard dividend reinvestment program on steroids. 

Additionally, Gen-Z has a much larger demographic involved in the gig economy, supplemented by side hustles, as opposed to the 9-5 office timeclock punching of previous generations. When there are lulls between contracts, the income from YieldMax ETFs can come in handy to bridge the income gap during those periods. 

While the Reddit poster is also correct that the history of Yield Max ETFs and other covered call, high dividend funds is still limited, their large, annual dividend distributions create another possibility: the chance for one to recoup their principal investment in the ETF in under 5 years, especially for those ETFs with market prices in single digits, such as ULTY, which has an 88% distribution yield at the time of this writing. Such a scenario mitigates the risk of capital erosion reducing the ETF to zero before recoupment. 

Nevertheless, focusing a DRIP program exclusively on an ETF with that kind of risk can reach a point of diminishing returns, so portfolio diversification to 20-25% of conventional growth investments might be prudent for the following reasons:

• Covered Call ETFs have limited upside in favor of the option premiums that deliver the dividends. Having some involvement in the pure upside of some of these high flying stocks can help to participate in those gains.
• A portfolio that is heavily weighted towards the ETFs from only one or two issuers runs a potential regulatory risk if the SEC halts trading of those ETFs due to an investigation or an alleged violation. 
• The success of covered call options is predicated upon a bull market with an option market appetite for call options wagering on upside appreciation.  A market that turns bearish or goes sideways can dry up the demand for those call options and consequently shrink the premiums and the dividend income. 

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