With the new administration now in full swing, market events are coming our way at a furious pace.
One thing that’s clear about the next few years? Volatility is likely to tick up, especially with stock valuations stretched. Now more than ever, we need to be diversified, so we’re set up to offset any shocks to any one sector while we collect our high closed-end fund (CEF) dividends.
So that’s what we’re going to do today. And CEFs are the best tool to do it. Through just three funds (see tickers below), we’ll give ourselves access to some of the top blue-chip stocks, real estate investment trusts (REITs) and high-yield bonds out there.
Better still (for safety, as well as income), we’ll get a big slice of our return as dividends, as these three funds pay an 8.8% average yield between them. That’s about seven times what the average S&P 500 stock pays. Plus, these yields are sustainable.
Beating the Average American Salary—in Dividends Alone
To say that this “dividend difference” is a big deal is an understatement. Consider a million-dollar portfolio put into the S&P 500 versus these three funds. That’d get you about $1,008 per month with the index, which no one can live on anymore. But that same amount in this three-fund portfolio gets you $7,333 per month—more than the average monthly paycheck in America.
Let’s see how these funds’ high-quality assets help sustain those payouts. Their bargain valuations help out a bit on the dividend front, too.
CEF Pick No. 1: A 7.5% Dividend From Blue-Chip US Stocks
A great place to start is with the Nuveen S&P 500 Dynamic Overwrite Fund (SPXX). I say that because this CEF should appeal to anyone who currently holds an S&P 500 index fund, since its mandate is to buy all of the stocks in that index.
That means you’ll get names like Microsoft (MSFT), Apple (AAPL), Visa (V), Bank of America (BAC) and other well-known reliable performers that form the backbone of the economy. They’ve helped SPXX deliver strong long-term gains.
Big-Name Stocks Drive SPXX’s Gains
At the same time, SPXX yields 7.5%, while S&P 500 index funds yield just around 1.2%. That higher yield comes from two major sources. The first is SPXX’s covered-call-option strategy, in which it sells contracts to investors who pay for the privilege of buying the fund’s stocks at a future date at a predetermined amount.
SPXX then hands the cash it receives for selling these option contracts to investors as dividends.
Second, SPXX will occasionally sell certain holdings and hand the profits to investors, again in the form of dividends. That means you don’t have to worry about buying or selling your shares to rebalance your position. Just let the income flow your way as the managers do all the work.
There’s a third reason why that yield is so big, and that’s one of the really cool things about SPXX and CEFs like it. SPXX trades at a 5.8% discount to net asset value (NAV, or the value of its underlying portfolio) as I write this, so we’re getting a bargain that ETF buyers simply don’t have access to.
This also means that management can pay out that 7.5% dividend, based on the market price of SPXX, while earning just 7.1% from its NAV, or portfolio value. Remember that the S&P 500 has returned 10% per year on average, so that 7.1% profit per year should be easy for SPXX to achieve.
CEF Pick No. 2: A Diversified REIT Fund That Leans Toward Growth
The Cohen & Steers Quality Income Realty Fund (RQI) is a real estate focused CEF that I talk about a lot, for a simple reason: Its management has a proven track record of picking the best REITs. Cohen & Steers has 39 years of experience managing real estate assets for clients and manages over $100 billion in assets.
RQI’s yield is also 7.5%, which is pretty easy for the fund to deliver, since management’s annualized returns since RQI’s 2002 inception has been 9.1%.
RQI’s Long History of Profits
RQI trades around the par value of its portfolio now, but there’s a good reason why. Returns from the fund’s portfolio nicely cover its dividend. It also holds REITs from various industries and regions, so we can look at it as a kind of “one-stop shop” for REIT investing. (RQI also holds a small lot of high-yielding preferred shares.)
RQI Is a Textbook Diversified Fund
Source: cohenandsteers.com
If that weren’t enough, RQI invests in over 200 real estate assets, most of which are stocks in REITs that themselves manage hundreds (or in some cases thousands) of individual properties.
Top holdings include cell-tower REIT American Tower (AMT), warehouse giant Prologis (PLD) and data-center landlord Equinix (EQIX). That’s unparalleled diversification, with a leaning toward some of the most in-demand real estate in the US. That gives us extra reassurance as we collect RQI’s 7.5% payout.
CEF Pick No. 3. A Reliable 11.4% Dividend From High-Yield Bonds
Now let’s boost the income stream on this “mini-portfolio” with the PIMCO Access Income Fund (PAXS), whose 11.4% income stream is enormous, but also sustainable. And there’s a simple reason why.
Strong Corporate-Bond Yields Help Sustain PAXS’ Income
Above we see the average yield for high-yield corporate bonds, which has hovered around 7% since early 2022. Note that Fed rate cuts have pushed that average lower over the last year and a half.
This matters for PAXS, a buy recommendation of my CEF Insider service, because the fund invests in bonds similar to those in this index, or “bond-like” assets that are fairly comparable. It has also been collecting that income, which it has been handing over to investors as cash dividends.
Since the average effective maturity for the bonds in PAXS’s portfolio is now 6.3 years, that means it’s effectively secured bonds at these high yields to fund payments to investors for many years to come.
But you might be thinking, that’s 7%, which is far below the 11.4% PAXS pays out. While that’s true, remember that the Federal Reserve is expected to cut rates over those six years, which will boost the value of PAXS’ bonds (since they pay out more than newly issued bonds would). As that happens, PAXS can sell those bonds at a profit and hand that over to investors as dividends.
Now this fund does trade at a slight premium (3.4%) to NAV, but that’s actually a bargain for a fund from PIMCO, which is a revered name among CEF investors. PIMCO funds often trade at premiums—and those premiums regularly stretch into double digits.
The Total Portfolio
These three funds together get us an 8.8%-yielding portfolio with a nice mix of stocks, bonds and REITs. And since you can buy all three of these CEFs through any stock brokerage (CEFs are bought and sold like stocks over exchanges like the NYSE), this is an easy way to diversify across hundreds of assets all at once.
— Michael Foster
These 5 CEFs Drop Monster 10%+ Divvies, Pay Monthly [sponsor]
The really cool thing about CEFs—including RQI and PAXS above—is that many of them pay us dividends every single month.
So not only are you getting access to double-digit yields here, but you’re saving yourself the time (and hassle) of managing a “lumpy” income stream from quarterly payers, too!
This is a good time to recap all the benefits that CEFs give us, so let’s do that:
- Big yields (of course!), giving us more of our return in safe dividend cash.
- Big discounts (letting us buy without fear of overpaying and, yes, strengthening our dividend payouts, too).
- Instant diversification (for even greater safety), and …
- MONTHLY payouts (for extra convenience).
With all that in mind, it’s no wonder why wealthy investors favor CEFs. AND we can get the same access to them that billionaires do, since these funds trade on the public markets.
I want to give you a head start with the 5 top monthly paying CEFs on the market today. I’ve hand-picked these 5 winners for their high yields (I’m talking 10% average yields here), deep discounts and, yes, rock-solid monthly payouts.
You do not want to be without these sturdy income plays in the volatile years ahead. Click here to learn more about them and download a free Special Report revealing their names and tickers.
Source: Contrarian Outlook