The New American Hustle: Dividends Over Day Jobs

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The current wave of interest is new enough — and many of the followers young enough — that it has been easy to ignore how the most popular funds have often lagged basic stock indexes and threaten to eat away at long-term returns. Samuel Hartzmark, a professor of finance at Boston College, has researched the issue for more than a decade and has found that investors tend to fall for the “free dividends fallacy,” treating them and capital gains as separate. A 2015 paper of his finds that investors prone to that bias have a preference for funds that report boosted dividends even if they don’t improve overall returns.<!–>

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“A lot of people think of the dividend as separate from the cash flow,” he says. “They don’t realize it comes at the expense of the price level and isn’t making you richer.”<!–>

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The appeal of regular payouts has long led investors into stocks and funds that offer quarterly and annual income. Christine Benz at Morningstar Inc. calls it “the psychological pull of the ‘bird in the hand.’” One of the biggest dividend-focused ETFs, the Schwab US Dividend Equity ETF, launched in 2011 and now has more than $70 billion in assets with a yield of around 4%.<!–>

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A new, faster-growing generation of funds offer payouts that are much higher – sometimes above 100%. Take one product, operating under the ticker MSTY, that is tied to the volatile stock of the Bitcoin-hoarding company known as Strategy.<!–>

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The fund has roughly $5 billion in assets and promotes a “distribution rate” of about 90%. These payouts are generated through a complicated series of options bets. This setup has made the monthly payouts possible but it has also weighed on the ETF, which has underperformed the underlying company by about 120 percentage points since its inception in February 2024 – and that assumes you reinvested all the dividends it generated. If you pocketed the dividend, as many influencers do, your account would have been left with a security that lagged Strategy’s return by nearly 200 percentage points.<!–>

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Changes made since 2019 by the Securities and Exchange Commission – streamlining ETF approvals and derivatives rules – cleared the way for the wave of funds and new asset managers offering massive yields.<!–>

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The Manhattan event that Breece attended, at the Nasdaq, was sponsored by YieldMax, which is responsible for many of the fastest-growing products in the industry, including MSTY. The more than 50 ETFs that the company has created since 2022 have seen about $5 billion in inflows just since the finfluencers rang the closing bell at the exchange on July 11.<!–>

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The math these products use – payouts today, erosion tomorrow – have drawn sharp criticism from Wall Street pros, who warn that investors may mistake current dividends for long-term wealth, ignoring how big yields often come at the expense of price returns and overall portfolio growth. Benn Eifert, managing partner at the volatility-focused hedge fund QVR Advisors, has been an outspoken critic of some of the issuers behind this new trend.<!–>

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“They’re fooling people into thinking that they’re somehow getting income,” Eifert said. “All you’re doing is giving me my money back, so the value of the ETF is declining as you’re paying me that.”<!–>

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YieldMax executives, for their part, say they are upfront about what the products are designed to do: generate attractive yields for their holders.<!–>

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“If you want to just own the underlying stock, own the underlying stock. We’re not trying to beat the underlying — we’re trying to turn the volatility of the stock into income,” says Michael Venuto, co-founder at Tidal, which helps launch YieldMax’s ETFs. “People who are only trying to get the upside should not buy YieldMax products.”<!–>

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