What’s the catch with ULTY’s 89% dividend, or is it real?

Now, I’ve done quite a few posts on the YieldMax Ultra Option Income Strategy ETF (NYSEARCA:ULTY) of late. The dividend yield, which is floating around 89%, looks rich again, thanks in part to plentiful demand for call options on a number of stocks that ULTY’s active managers have written via a covered call strategy.

And while covered calls do allow investors to earn more yield than they would with a more traditional dividend ETF, it’s worth understanding the differences between covered call ETF distributions and dividends paid out by an equity fund that doesn’t employ any options strategies. The important thing is the net effect of the share price moves and the dividends paid.

To put it simply, I don’t think asking oneself if the ULTY ETF’s yield is “real” is the right question.

Really, what constitutes real? If you pick up shares, you’ll quickly find that you will, in fact, get paid a monthly distribution that is multitudes higher than most other dividend stocks in your portfolio.

And while it is real cash dripping into your portfolio, the big question, I believe, that prospective investors should ask is how long the days of 80-100% yields will last and what could happen in a bear-case scenario that sees the entire stock market fold up, with tech (and those smaller hyper-growth AI and quantum computing innovators) falling into the blast zone of the next financial market sell-off. Will the yield fall back to earth? By how much? 

The real questions investors should ponder when it comes to 90-100% yielding ETFs

Will the hefty payout be far smaller than the potential share price depreciation in such a scenario? How easily could investors be scared out when the tides finally do turn?

These are questions that I simply do not have the answers to. Indeed, shares have been quite volatile out of the gate, now down just over 71% from their high hit back in March 2024. And while the yield (it’s actually closer to 90% right now) has more than made up for the steep drop (the net effect, believe it or not, is actually positive if we’re talking about total returns since the ULTY went live on public markets).

Since its 2024 debt, the ULTY is actually up 14%. Indeed, that’s not bad, especially if, for some reason or another, you want capital losses and a sky-high yield, perhaps to meet the higher costs of living and to offset gains elsewhere in your portfolio.

In any case, the huge capital depreciation to $5 and change has accompanied an even larger payout. And these are real cash dividends. However, in terms of achieving significant gains and dividends, it’s also challenging to determine what’s on the roadmap, especially since ULTY has only been around for a short time.

ULTY shares are plunging, but the yield makes up for it.

It’s been just over a year, and that simply isn’t enough history, in my view, to project how the shares will fare in the next big bear market or rotation out of tech (perhaps a growth-to-value rotation could hit just as hard). Could there be a scenario where shares rally and the yield continues to line the pockets of investors and traders? That’s what makes ULTY such an exciting trader’s playground!

Either way, ULTY is a name that could go either way. And as the yield approaches 100% again, investors must ask themselves if they believe the current environment will lead to a 50% downside from their purchase price. That’d effectively be a break-even point.

The yield and shares could move higher if we haven’t yet seen the peak in enthusiasm for tech and the AI boom. However, I have absolutely no idea what kind of downside to expect (on total returns) if we do roll into an economic recession. In short, I view the ULTY as navigating uncharted waters. The big question is whether there will be a pot of gold at the end.

In any case, I view the ULTY as a great place for traders with a plan in mind.

Notably, if we’re not yet at peak AI hype, I do envision a scenario that could greatly reward traders who get the timing right. If you’re a seasoned trader who thinks AI is different this time, perhaps the ULTY could be a worthy trade while the shares are down and the yield is up. It’s a complicated security, to say the least, and I will be interested to see how it fares once investors turn against tech.

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