I Invested $1,000 in ULTY – Can I Quit My Job by Dropping $100,000 into This Dividend Stock?

Investing can be an exciting way to grow your wealth. When you involve dividend stocks, it could seem like the steady stream of income rivals your own paycheck, causing you to dream about living off of these payments. That is precisely the scenario faced by one Redditor, who published a post in the r/YieldMaxETFs subreddit.

After investing $1,000 in the YieldMax Ultra Option Income Strategy ETF (ULTY), within a week, he was hooked. And upon earning his very first dividend payment of around $19, he was ready to jump ship from his 9-5 so that he could live off of dividend checks. His strategy was simple, involving back-of-the-napkin math revealing that by investing $20 per week for 52 weeks, he’d have recouped his investment in as little as one year. After that, as he put it, he would be “playing entirely with house money.” 

While that may be true, there’s a difference between supplementing one’s income with dividend payments and depending on it. Our Redditor takes things to the next level by contemplating pouring $100,000 into UTLY and quitting his job. Through this Redditor’s lens, his biggest risk is the share price tanking, and he’s looking for some direction. He is also contemplating using those funds to open a Roth IRA for benefits like tax-free withdrawals. While we urge him to speak with a financial advisor before doing anything rash, we’d like to offer him some of our own insights.

Don’t Put All Your Eggs in One Basket 

As an actively managed fund, ULTY is designed to provide monthly income by running covered calls across a portfolio of U.S. securities. By nature, covered calls involve a high degree of risk, including a potential for capital depletion. The expense ratio of 1.24% is high for an actively managed fund, even one whose advisor has been known to offer a 0.10% fee waiver.

When you’re building your portfolio, the golden rule often comes down to this: don’t put all your eggs in one basket. Spreading your investments around, or diversifying, is your best defense against unexpected market turns. Investment pros turn to diversification for a reason; otherwise, their fate would be tied to the performance of a single stock, sector or ETF. A diversified portfolio better equips your portfolio to absorb unexpected shocks so if one security sinks, it doesn’t drag the entire portfolio down with it. 

Next, it’s important to remember that high distribution yields don’t always translate to smooth sailing or strong total returns. So even if an investment may be generating income, its underlying value can take a hit. Keep an eye on the fund’s net asset value (NAV) to assess the value of the fund so you know when it might make sense to sell. 

Also, you’ll want to look under the hood, so to speak, at the ETF’s fundamentals. In the case of ULTY, this can be a tricky endeavor, considering the use of derivatives and options isn’t always the most transparent of strategies, making it risker than simply investing directly into stocks or bonds. One thing is for sure – ULTY thrives on volatility, and therefore its ability to generate that high monthly income is directly tied to the level of market turbulence and price swings in its underlying assets.

Broader Market Exposure 

The real power comes from how you diversify that portfolio. Think about potentially spreading your capital beyond speculative bets into broader index funds, like the Vanguard S&P 500 ETF (VOO). This way, you’re not just relying on a specific strategy or a handful of underlying stocks to perform. Instead, you’re accessing the broader market’s growth potential, which has generated trillions of dollars in wealth over the decades. This creates an opportunity for one outperforming asset class to offset weakness in any underperforming category in changing market cycles. 

And when you’re looking at any investment, whether it’s a high-yield ETF or a growth stock, digging into the company’s financials and its market position is key. One of billionaire investor Warren Buffett’s rules is to only invest in businesses whose underlying business models he understands. It wouldn’t hurt to take a page out of Buffett’s book. 

Yet another strategy is to consider a dollar-cost averaging. Instead of pouring a large lump sum all at once and hoping you timed it right, you instead invest a certain amount at regular intervals – say, $1,000 monthly. This approach smooths out your entry price over time, as you buy more shares when prices are low and fewer when they’re high. It also takes emotions like fear and greed out of the equation for the most part.

Finally, consulting with a qualified financial advisor is always a wise step. They can help you craft a strategy that supports your financial goals, risk/reward profile and tax situation. This is especially true if you’re considering opening a tax-sensitive account like a Roth IRA, giving you a greater chance of making the most tax-efficient choices for building long-term wealth. 

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