These High-Risk High Reward ETFs Offer Dividends Up To 84% … But Only If You Can Stand The Heat

Regarding dividend investing, the total percentage yield is the proverbial great white whale that dividend investors are hunting. However, the biggest whales usually swim in the deepest water, which poses a higher risk for whalers. The same applies to two Yieldmax ETFs, which pay 84% and 77% dividends while betting on magnificent seven stocks. Keep reading to find out if these offerings are right for you.

Tesla and Nvidia are two of the hottest Magnificent Seven stocks in terms of delivering share growth for investors, but they don't offer the strongest dividends. Yieldmax has devised a unique way to (theoretically) give investors the best of both worlds via high-earning ETFs. Instead of buying shares in Tesla and Nvidia, these ETFs maximize investor return by trading options on Tesla and Nvidia stock.

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The YieldMax NVDA Option Income Strategy ETF NVDY pays an incredible 84%, while the YieldMax TSLA Option Income Strategy ETF TSLY is churning out an eye-popping 77% dividend. Numbers like this are certainly impressive but considering that most investors turn cartwheels over 10% dividends, it's understandable if you're wondering if there's a catch. 

The potential catch is these ETFs’ approach to generate those high dividend yields. Unlike most traditional ETFs which own diverse stock portfolios, these ETFs aggressively purchase options on Nvidia and Tesla. The fund uses a combination of investor capital and treasury securities to serve as collateral and then generates option spreads on the respective stocks. 

The ETF's option trading method falls into one of two categories. Yieldmax refers to the first method as a "standard strategy" where the ETF sells call options and put options on the underlying stock to create investor profits. The other method, which they call an "opportunistic strategy," works by selling "at-the-money-call options" and buying "at-the-money-call options" to give investors chances to profit if the stock price goes up. 

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In either case, the main focus for these ETFs is generating income for investors, not share price appreciation. Options trading is known for being able to generate large sums for investors in short periods. Unfortunately, you can lose just as big if you wind up on the wrong side of a deal.

There is another caveat aside from the inherent risk associated with options trading. If these ETF share prices depreciate over time, which many analysts believe is likely, the high yield percentage may not deliver more profit than simply owning shares of the underlying stock. Each ETF's payout is also inextricably tied to the performance of only one stock, as opposed to being highly diversified like many other ETFs. 

All that elevates the risk profile of these ETFs. So, despite the high-performance potential these ETFs offer, a savvy investment advisor might caution you not to put large chunks of your portfolio into these ETFs. It may also be advisable to redeem your dividend payments instead of reinvesting them into more shares. With that in mind, 84% and 77% dividends are intriguing enough to make these ETFs worth a second look. 

Wondering if your investments can get you to a $5,000,000 nest egg? Speak to a financial advisor today. SmartAsset’s free tool matches you up with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you.

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