With 2022 likely to be a wild ride, we income investors are going to lean on two key advantages. In doing so, we’ll secure 7% dividends no matter what the broader markets do.
First, we can secure this “head start” by January 1 by purchasing funds that yield 7%, on average. And these aren’t risky payouts, by the way. I’m talking about secure dividends funded by real cash flows.
And secondly, we can buy them from the bargain bin for just 90 or 95 cents on the dollar! That’s better than most investors, who pay full price (or more!) for their stocks. Yikes.
We won’t find these deals—or really any discounts—in popular stocks right now. Fortunately, we have the ability to type in little-known tickers that represent the best dividend vehicles on the planet.
The closed-end fund, or CEF for short.
Most mutual funds and ETFs yield between 1% and 3%, give or take. Even at the high end, we’re talking about an annual income stream of just $30,000—and that’s if we have at least a million bucks to play with.
CEFs pay more. And when we buy them at discounts, they charge less! CEFs often pay 7% or better. This makes a big difference when we’re talking about retirement income on a million dollars:
The Only Funds We Can Buy on Sale
There’s no overstating the income potential of CEFs, but they boast another leg up on their more popular cousins:
We can get them at a discount.
Unlike mutual funds and ETFs, closed-end funds have a limited number of shares. That means that when markets panic, they can (and often do) trade at a discount to their net asset value (NAV). Let’s take a fund trading at a 5% discount to NAV: That means we’re effectively buying all the stocks and/or bonds inside for 95 cents on the dollar!
Think about it: Not only can we benefit from the inherent growth of the fund’s holdings, but we can enjoy additional value upside, too—just like we would with an underpriced stock—and high dividend yield to boot!
So, let’s get ready to make some game-changing moves that will put us on the right foot not just for 2022, but well beyond. Let’s quickly look at 22 CEFs that offer up yields of at least 5.4% but up to an astounding 36.5%, and trade for less than their assets are worth.
U.S. Stocks: Go Above and Beyond the Basic Index Fund
Instead of investing in, say, an S&P 500 tracking fund, or a sector ETF like the Technology Select Sector SPDR Fund (XLK)
Take BlackRock Science and Technology Trust (BST), for instance. This CEF stands out in part because of a stellar payout that yields nearly 6% at current prices. But another part of the appeal is how BST is run.
Like just about every other CEF, this is an actively managed fund whose portfolio generally looks like a broad tech offering. Its 125 holdings include the likes of Apple
On top of that, BST puts options strategies to work, employing covered calls to help reduce volatility and generate income.
Fixed Income: These Bonds Aren’t Boring
Closed-end funds are also a fantastic way to get fixed-income exposure, especially in a low-rate environment like this.
The iShares J.P. Morgan EM High Yield Bond ETF (EMHY)
We can do better with CEFs. In fact, we can secure the same type of yield out of tax-free municipal bonds, and even more substantial income once we get into junk and convertible funds.
Let’s consider the Nuveen Enhanced Municipal Value (NEV). This fund holds about 260 municipal issues, from health-system revenue bonds to general obligation debt. Credit is utterly unremarkable—almost 80% of its portfolio is investment-grade, so it’s not sacrificing quality to offer up big income.
However, unlike an ETF or a mutual fund, Nuveen’s NEV can put debt leverage to work. The fund currently has 33% leverage in use, allowing management to put even more money to work in their top picks.
And most of that 5.8% yield—paid monthly, no less—is bond income, meaning it’s free of federal tax obligations. If we’re in the top tax bracket, we’re receiving a tax-equivalent yield of 9.2%!
The Oddballs: Alternative Strategies
This penultimate cluster of CEFs is made up of two groups of funds: covered call strategies and “allocation” funds (read: stocks and bonds together).
Nuveen S&P 500 Dynamic Overwrite (SPXX), for instance, invests in about 300 S&P 500 holdings to somewhat mimic the index’s performance. It then sells covered calls against its equity holdings to smooth out performance and generate more income. That’s one way to get Meta Platforms (FB) and Alphabet (GOOGL) to pay us 5.4%!
Eaton Vance Tax-Advantaged Dividend Income (EVT), meanwhile, is a “portfolio in a can.” The asset mix at the moment includes 75% in U.S. equity, but also 8% in investment-grade debt, 7% in preferreds, 6% in junk bonds, and sprinkles of foreign stocks, convertible debt and cash. And incredibly, this diversified portfolio still yields nearly 7%.
International Funds: Ignore Them If You Hate Money
Many investors tend to overlook foreign funds, and I understand why: US stocks have been the superior performer for years on average. But in doing so, we miss some overseas moonshots!
Templeton Dragon (TDF) and The India Fund (IFN), which invest in Chinese and Indian equities, respectively, sport outsized yields of 36.5% and 11.5% at the moment. And while that’s historically lofty for both of them, high-single-digit and low-double-digit yields are very much the norm.
All the credit here goes to the funds’ managers, who have proved for years that for certain classes of investments, it pays to pay specialists rather than getting cheap and settling for income funds.
Brett Owens is chief investment strategist for Contrarian Outlook. For more great income ideas, get your free copy his latest special report: Your Early Retirement Portfolio: 7% Dividends Every Month Forever.