How Does BSTZ Pay Nearly Triple Treasuries? (11.9% Yield)

"For the past century, dividends from stocks or bonds were primarily of interest to older, conservative investors who had made their money and were seeking principal protection and income. The concept of using covered call options against a portfolio for income has been a strategy deployed by hedge fund managers and traders for decades - but rarely deployed in collected fund structures, such as Exchange Traded Funds (ETF), Closed End Funds (CEF) or mutual funds."

"Over the past few years, YieldMax premiered high dividend single stock ETFs based on the volatility of Magnificent 7 tech stocks (Amazon, Apple, Alphabet/Google, Microsoft, Nvidia, Meta Platforms/Facebook, and Tesla), and Bitcoin influenced stocks like Microstrategy. The high yields have caught attention from wealth building minded investors who are using dividend compounding as a strategy to supplement capital gains. Compared to the current US Treasury 10-year Bond yield of 4.04%, double digit yields from these ETFs have become normal."

"For example, the YieldMax ETF for Microstrategy, YieldMax MSTR Option Income Strategy (NYSEARCA: MSTY) sports a distribution yield rate of 91.35% at the time of this writing. Distributions are monthly. However, since its February 2024 inception debut at roughly $21, the stock price has fallen to the $15.50 region. In order to maintain the high dividends each month, MSTY has had to dip into its NAV in order to make up for any shortfalls."

For decades dividends appealed mainly to older, conservative investors seeking income and principal protection. Covered-call option strategies were used by hedge funds and traders but rarely packaged in ETFs, CEFs, or mutual funds. In 2006 Invesco launched the first covered-call ETF, PBP. Recently YieldMax introduced high-dividend single-stock ETFs tied to volatile Magnificent Seven tech names and Bitcoin-influenced firms like MicroStrategy. These ETFs can produce double-digit, even triple-digit, distribution yields that attract income-focused investors. High distributions often come with NAV and market-price erosion. Some funds, such as MSTY, have paid large monthly distributions by dipping into NAV, creating sustainability risks when option premiums shrink.

Read at 24/7 Wall St.