In late November 2022, a company called YieldMax released a fund like no other. Its ticker was TSLY, and its annualized distribution rate sometimes exceeded 100%.

Many investors, including those with little or no investing experience, saw the yield and thought, “I can make 100% per year?” Money poured into the fund, which was based on Tesla (TSLA), a highly volatile stock with passionate retail speculation. Over time, TSLY’s NAV declined, and YieldMax eventually did a reverse split on the fund. During this period, YieldMax launched additional funds, and many followed the same pattern: high percentage distributions, but declining NAV meant shrinking dollar payouts. This left YieldMax with very unhappy investors.

Throughout this time, YieldMax was transparent about how the funds worked. The company’s owner, Jay Pestrichelli of ZEGA Financial, did dozens of interviews on news shows and YouTube, explaining clearly that if you didn’t reinvest the dividends, you were divesting from the fund. Despite his warnings, many investors didn’t understand the mechanics or chose to ignore them. I don’t blame YieldMax for this.

In fact, several YieldMax funds have performed well: CHPY, GDXY, SOXY, and BIGY. CHPY and GDXY don’t target a specific distribution rate, while SOXY and BIGY target 12%. I also expect YieldMax’s newer target-25% funds to do well in strong bull markets (NVIT will, anyway. The rest of the underlyings for the other funds suck).

I say all of this because the history of the ultra-high-yield community and YieldMax is instructive. As I’ve watched the saga unfold, I’ve concluded that many content creators covering these funds don’t actually understand them. In this article, I’ll explain how ultra-high-yield funds actually work, when they make sense, and how to use them without losing your shirt.

What are Ultra-High-Yield Funds?

Ultra-high-yield funds, like those from YieldMax, Defiance, and GraniteShares, are not traditional dividend funds. They don’t own a portfolio of dividend-paying stocks and pass through the dividends. Instead, they use options strategies (primarily covered calls and synthetic positions) to generate income from stocks that may not pay dividends at all, or pay very little.

The most common structure is the covered call strategy. The fund either owns shares of the underlying stock or uses synthetic positions to replicate ownership, then sells call options against those positions. The premium collected from selling those calls is distributed to shareholders as “dividends.”

But here’s what most people miss: these aren’t dividends in the traditional sense. They’re option premium income. And option premium income behaves very differently than corporate dividends.

When a company pays a dividend, it’s distributing a portion of its earnings. When an options-based fund pays a distribution, it’s monetizing volatility and giving up upside. If the underlying stock rips higher, the fund’s upside is capped at the strike price of the calls it sold. The distribution you received came at the cost of potential gains.

This is why these funds can have massive yields during sideways or moderately bullish markets, but they get crushed when the underlying stock goes parabolic. You trade participation for income. That’s the deal.

When Ultra-High-Yield ETFs Work

Ultra-high-yield funds work best in specific market conditions:

1. Strong, sustained momentum in the underlying sector. If you’re holding NVDY or NVIT during a raging AI bull market, you’re collecting fat premiums while the underlying appreciates steadily. The fund gives up some upside, but you’re still getting capital appreciation plus high income. This is the sweet spot.

2. Sideways or choppy markets with high implied volatility. When stocks are bouncing around but not trending strongly in either direction, option premiums are elevated. The fund collects premium, the stock doesn’t run away from you, and you get paid to wait. This is where covered call strategies shine.

3. You have an exit strategy. The single most important factor is knowing when to get out. These funds are not buy-and-hold-forever investments. They’re tactical plays. You enter when the sector has tailwinds, you collect distributions while momentum is strong, and you exit when the tailwinds fade or the underlying fundamentals deteriorate.

I’ve made this a personal rule: once I sell out of a more aggressive or leveraged ultra-high-yield fund, I lock those gains into my core funds (GPIX and GPIQ, in my case). I only deploy new capital into riskier plays when worthy opportunities present themselves. This prevents me from chasing returns with my winners and keeps my core portfolio intact.

When Ultra-High-Yield Funds Don’t Work

These funds fall apart in specific scenarios:

1. Bear markets or steep drawdowns. When the underlying stock tanks, the NAV of the fund tanks with it. The distributions might remain high on a percentage basis, but the dollar amount shrinks because the NAV is shrinking. If you’re taking distributions in cash and not reinvesting, you’re liquidating your position at declining prices. This is exactly what happened to early TSLY holders.

2. Parabolic moves in the underlying. If you’re holding a covered call fund and the underlying stock goes vertical, you’re stuck watching from the sidelines. Your upside is capped, and you massively underperform just holding the stock. This is the price you pay for the income.

3. You don’t understand the mechanics. If you think the yield is “free money” and you’re not tracking NAV, you’re going to get blindsided. These funds require active management and understanding. These are not instruments for passive investors. It requires active monitoring and involvement.

A Note on Other Strategies

Not all ultra-high-yield funds use covered calls. Some funds, like those from Defiance and others, use put-selling strategies, synthetic dividends, or more complex option structures involving spreads and collars. These strategies have different risk-return profiles than covered call funds.

Put-selling funds, for example, collect premium by selling puts rather than calls, which means they’re exposed to downside risk in a different way. Funds using spreads or collars often have lower yields but more defined risk parameters.

I’ll cover these alternative strategies in a future article, as they deserve their own analysis. For now, just know that when I refer to “ultra-high-yield funds” in this piece, I’m primarily talking about covered call and synthetic covered call strategies like those used by YieldMax.

Common Misconceptions

Misconception 1: “The yield is guaranteed.”

No. The yield fluctuates based on market conditions, implied volatility, and the fund’s ability to generate premium. A fund targeting 25% annual distributions might pay that in a bull market and 10% in a bear market.

Misconception 2: “I can just take the distributions and live off the income.”

Only if the NAV is stable or growing. If NAV is declining and you’re taking distributions in cash, you’re eating into principal. If your NAV is decreasing, your income will shrink with it. And if your total returns aren’t positive, you’re losing money, income or not.

Any income you plan to live off of should at least be stable. While some covered call funds have been stable since inception, that’s unlikely to last forever. You must be ready to pivot when the time comes. Remember, income and total return are NOT the same thing.

Misconception 3: “These funds are a scam because the NAV declines.”

NAV declines happen for two reasons: the underlying stock declines, or the fund is paying out more than it’s earning in premium (return of capital). The first is a market risk you accept. The second is unsustainable and should be avoided. But neither makes the fund a scam—it makes it a tool that requires understanding.

Misconception 4: “Reinvesting dividends solves everything.”

Reinvesting helps you maintain share count, but it doesn’t change the underlying economics. If the fund is in a declining NAV spiral because the underlying stock is tanking, reinvesting just means you’re buying more shares of a sinking ship. Reinvesting works when the underlying has momentum. It doesn’t fix a broken thesis.

My Approach

I use ultra-high-yield funds tactically, not as core holdings. I look for funds in sectors with clear tailwinds: AI, semiconductors, biotech breakthroughs, commodities in supercycles. I enter when momentum is strong, I collect distributions, and I exit when the tailwinds fade or the chart breaks down.

I treat these funds like businesses. If the business (the underlying sector) is thriving, I stay invested. If the fundamentals deteriorate or the technicals roll over, I exit. I don’t marry positions. I don’t hope and pray. I allocate capital, extract value, and move on.

And here’s the key: I lock gains from these tactical plays into my core holdings. GPIX and GPIQ are two examples that provide diversified income and growth exposure. They’re the foundation. Ultra-high-yield funds are the opportunistic layer on top. When I take profits from the opportunistic layer, those profits go into the foundation. New capital, not recycled gains, goes into the next tactical play.

This keeps me from eroding my base and ensures that even if I get a tactical call wrong, my core portfolio continues compounding. If things work out the way I hope, the ultra high-yield ETF grows in NAV despite their very high distributions. This has happened for CHPY and GDXY, but that doesn’t mean that the NAV will not eventually decline when those markets cool down.

Conclusion

Ultra-high-yield funds are not for everyone. They require understanding, active management, and discipline. But used correctly, they can be powerful tools for generating income in the right market conditions.

The people who got wrecked by TSLY didn’t lose money because YieldMax is a scam. They lost money because they didn’t understand what they were buying. They saw a big yield, assumed it was passive income, and ignored the mechanics.

Don’t make that mistake. Understand the product. Know when to use it. Know when to walk away. And above all, treat your portfolio like a business, not a lottery ticket. In the next article, we will explore what it means to treat your portfolio like a business.

It sounds clever, but it’s not quite right.

The “Fake Income” Argument

Here’s the typical version of the argument you’ll see on Reddit or Twitter:

“A $100 stock pays a $4 dividend. After the ex-dividend date, the stock is worth $96, and you have $4 in cash. Your total wealth is still $100. You didn’t gain anything. You just moved money from one pocket to another. Dividends are fake income.”

On the surface, this seems airtight. But if you apply the same logic to any method of generating cash from investments, the argument collapses.

Selling Shares Isn’t “Real Income” Either

Let’s say you own that same $100 stock, but it pays no dividend. You need $4 for living expenses, so you sell 4% of your position. Now you have $96 in stock and $4 in cash.

Your total wealth is still $100.

By the “fake income” standard, selling shares is also fake income. You didn’t gain anything—you just moved money from one pocket to another.

So if dividends are fake, then so is every withdrawal strategy. The only “real” income would be money that appears out of nowhere without reducing your portfolio value—and that doesn’t exist.

Of course, someone can generate income by collecting dividends or selling their shares. The profit comes from total returns, not from the liquidation of assets, and profits are what determines if the income is sustainable.

All Income Comes from Somewhere

Any income comes from somewhere. It’s called accounting.

When your employer issues you a paycheck, that money comes out of their cash balance. Does that make your paycheck fake income? Of course not. It’s real money you can spend, save, or invest.

The difference with dividends is that you own the share, so you get to see the accounting behind how you receive your income. You can watch the stock price adjust on the ex-dividend date and convince yourself you’re just shuffling money around. But that same logic would make every form of income fake, because all income has a source and all transactions have two sides of a ledger.

The cash that hits your account is real. The tax bill you pay on it is real. Calling it “fake” because you can see where it came from leads us to absurd conclusions.

If You Can Receive More Than Your Principal, It’s Not Fake

Here’s a simple test. If it’s possible to receive more in cumulative income than your original principal amount over a period of time, can that income really be called “fake”?

Let’s say you invest $10,000 in a dividend-paying stock or fund. Over 10 years, you collect $12,000 in dividends while your position is still worth $11,000. You’ve received $23,000 in total value from a $10,000 investment. That extra $13,000 didn’t come from “your own money;” it came from the underlying cash flow and growth of the business or fund.

If you had instead owned a non-dividend growth stock and sold shares to generate $12,000 in cash over the same period, you’d have less than $11,000 remaining in stock (assuming the same total return) because you’d have reduced your share count along the way.

In both cases, you’re converting returns into cash. But only one gets called “fake,” and it’s not because the math is different; it’s because people misunderstand what income is: an inflow of liquidity.

All Income Reduces Invested Capital (Unless You’re Compounding)

The truth is simpler: any time you convert invested capital into spendable cash, you reduce the base that can compound going forward. That’s true whether the cash comes from:

Dividends taken in cash

Selling shares

Interest payments

Realized capital gains

None of these are “fake.” They’re all real conversions of invested capital into liquidity. The relevant question isn’t how the income is delivered. Rather, it’s whether the income is sustainable given the underlying economics.

Sustainability is the Real Question

A company that earns $10 per share and pays out $4 as a dividend is delivering sustainable income. The business generates enough cash flow to support the payout, and the remaining $6 stays in the company to fund growth, pay down debt, or buy back shares.

A company that earns $2 per share but pays out $4 as a dividend is delivering unsustainable income. The payout exceeds earnings, so it’s being funded by debt, asset sales, or return of capital. That’s not fake income. It’s real cash in your account, but it’s income that can’t last.

The same logic applies to selling shares. If you own a diversified portfolio returning 8% per year and you withdraw 4% annually, that’s sustainable (unless you run out of shares to sell). If you withdraw 10% per year, you’re eating into principal faster than it can grow, and eventually you’ll run out of money.

The method of withdrawal doesn’t determine sustainability. The rate of withdrawal relative to the underlying return determines sustainability.

Shares Compound, Dollars Don’t

Here’s something most people miss: Dollars don’t compound. The shares you own do.

When you sell shares to generate income, you’re not just converting capital to cash. You’re permanently reducing the number of shares you own, which means you’re losing the potential to profit from those shares in the future.

One might ask, “Why must it be framed this way? If the value of my other shares are going up, I am still making profit even if I am selling shares.” This is true, but even for brokerages that allow you to do sell fractional shares, you can only sell so small of a slice of one. And, since the ownership of the shares is the cause of your inflow of liquidity, your dollars are compounding on a per share basis. Once you sell a share, you have sold away an asset and lose the opportunity to continue to profit from it.

If you own 100 shares of a stock at $100 and it grows to $150, you make $5,000. If you sell 20 shares to generate income along the way, you only own 80 shares when the price hits $150, so you make $4,000 instead.

With dividends, you don’t have to sell shares to generate income. You maintain full ownership of your position, which means you retain the full opportunity to profit from future price appreciation and/or dividends on every share you own.

This is why “dividends don’t matter, total return is all that counts” misses the point. Yes, total return is what grows your wealth. But how you extract income from that total return determines how much ownership, and future upside, you preserve.

Why the Distinction Matters in Practice

So why do people care whether income comes from dividends or share sales if they’re economically equivalent on paper?

Because in the real world, behavior and market timing matter. I often tell people, “We live on a planet, not a spreadsheet.”

If you rely on selling shares for income, you have to decide what to sell and when to sell it. If the market drops 20%, you’re forced to sell more shares to generate the same dollar amount of income, which locks in losses and reduces your future compounding base. This is called sequence-of-returns risk, and it’s one of the biggest threats to retirement portfolios.

If you rely on dividends for income, the cash arrives automatically. You don’t have to pick a sell point, and you don’t have to liquidate shares during a drawdown. A well-structured dividend portfolio can keep paying you even when the market is down 30%, because the underlying businesses/funds are still generating cash flow.

That doesn’t make dividends “better” in every situation. Rather, it makes them structurally different in ways that matter for people who need predictable cash flow.

The Real Myth

The real myth isn’t that dividend income is fake. The real myth is that there’s a meaningful distinction between “real” and “fake” income based on how it’s delivered.

All income from investments is a conversion to liquidity. The only questions that matter are:

1.) Is the income sustainable given the underlying return?

2.) Does the structure fit your goals and behavior?

3.) Are you preserving enough ownership to meet your long-term goals?

If you’re in the accumulation phase of investing and don’t need cash, reinvest everything and let it compound: dividends, gains, whatever. If you’re in the distribution phase and need reliable monthly cash without forced selling, a dividend-focused strategy might be exactly what you need.

In conclusion, all income is real income. It doesn’t matter whether the source is profitable when defining income; however, profitability does matter if you wish to sustain your income.

Over the years, there has been a disconnect between growth investors and dividend investors. In fact, some growth investors (particularly content creators) have argued that dividends are “fake income.”

As someone who has spent a lot of time studying philosophy over the past decade and a half, it seems to me that the disconnect between these two camps is a result of unclear definitions. As far as I am concerned, however, both growth and dividend investors are ultimately income investors. A principal difference between the two is how they convert their portfolios to cash.

Rethinking What a Dividend Is

It is often said that a dividend is a share of profit in the form of a cash payment. I, however, do not see it that way. If a company is not profitable and still pays a dividend (as does often occur), are they sharing profits? How can they share profits if there is no profit to share? Such a definition seems incoherent to me.

The truth is, there are many forms of income, and unless you are the Federal Government, any money that is paid to someone has to come from somewhere. If you sell shares, the dollar amount comes out of your portfolio. If you collect dividends, the dollar amount comes out of your portfolio. If a company pays you a salary, that money comes out of their balance sheet. So all of us who seek to participate in the economy are seeking income.

And why do we seek income? Because we need liquidity. Cash can be exchanged for goods and services in a way that stocks, bonds, or real estate cannot. This distinction between liquid and illiquid assets is foundational to understanding what a dividend actually does.

And certainly, growth investors can produce income by selling their shares. However, dividend investors do not have to sell their shares in order to convert their portfolio to cash. Thus, not only are dividends conversions to liquidity, they are conversions to liquidity without selling shares.

Advantages of Dividend Investing

When growth investors sell their shares, they are losing the opportunity for the shares they sold to make them money. Certainly, their other shares may have increased in value, but there are only so many shares to sell. Dividends sidestep this problem entirely. As we’ll see in future articles, dividend strategies can safely support withdrawal rates above 4% per year, a threshold that becomes far riskier for growth investors relying on share sales.

This doesn't mean growth investing is a bad strategy. Certainly, it has its advantages. Selling shares offers tax control, timing flexibility, and potentially access to faster-growing companies. But for those prioritizing income in the distribution phase of investing, dividends offer a compelling alternative.

Conclusion

This definition, dividends as conversions to liquidity without selling shares, is the foundation for everything else we’ll explore in this newsletter. It changes how we evaluate ultra-high-yield ETFs, how we think about sustainability, and how we construct portfolios for income. If you’re rethinking dividends, you have to start by rethinking the definition itself.