Income-focused investors are in a real dilemma as government bond yields surge amid the rising inflation rate in the United States. Do they invest in the blue-chip Schwab US Dividend Equity ETF (SCHD) or invest in the higher-yielding JPMorgan Premium Income ETF (JEPI).

JEPI, SCHD, and 10-year government bonds

Bond investors argue that yields are so attractive today such that it makes sense to invest in them. The benchmark ten-year government bonds are yielding 4.6%, the highest level in years, and higher than the headline consumer inflation rate of 3.8%.

Most notably, analysts expect that bond yields will continue rising in the near term. For one, consumer inflation has continued rising amid the ongoing quagmire between the US and Iran. At the same time, even with Kevin Warsh at the Fed, chances are that it will be nearly impossible for the bank to cut interest rates.

Therefore, assuming that the yields remain at this level in the foreseeable future, chances are that a $10,000 investment will generate a risk-free return rate of $460. 

The same amount of investment in SCHD, which yields 3.3%, will bring in about $335 in dividends in a year. JEPI, with a $8.4% dividend yield will bring in about $840 in a year. 

Therefore, at face value, we see that JEPI is a better investment than the ten-year government bond and the blue-chip SCHD ETF. 

Why SCHD ETF is a better bet than JEPI and government bonds

The SCHD ETF pays the least dividend in our comparison, by far. Its return is about $505 lower than what the JEPI ETF is paying and $125 lower than what the ten-year government bonds are paying. 

However, government bonds have a major drawback in that they lack any growth aspect. As such, when you invest $10,000, you can be sure that you will receive the promised yield.

JEPI also has a major issue in that, while the dividend yield is strong, the stock return is usually weak. The situation is more pronounced when the stock market is in a strong bull run as most analysts expect. Indeed, looking back, data shows that its total return in the last 12 months was 8.3%, lower than SCHD’s 25.2%.

SCHD has two main catalysts ahead. First, technically, as we have written before, it has formed a cup-and-handle pattern, which often leads to more gains over time. Its ongoing consolidation is part of the formation of the handle section. 

SCHD ETF technical chart | Source: TradingView

Second, the ETF is a good hedge if the AI bubble bursts as some analysts predict. That’s because it is made up of companies in traditional industries like consumer discretionary, healthcare, financials, energy, and retail. 

A good example of this is what happened earlier this year when most AI companies, including NVIDIA, were falling. It did better than the S&P 500 Index, and those gains have held steady to date. It has jumped by 15% this year, while the S&P 500 has soared by 7%.

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