Get Paid Every Month With These 7.7% Yielding “Unicorn” Funds
IIf you rely on income from your portfolio, you to know how boring it is to manage a collection of quarterly dividend payers.
Take five of the most popular dividend-paying stocks on the market today: Johnson & Johnson (JNJ), JPMorgan Chase & Co. (JPM), Home Depot (HD), Procter & Gamble (PG) and Bank of America (BAC).
These are staples of every investor’s portfolio, but they are not a pathway to a steady stream of income! Here’s what your monthly payments would look like with this quintet if you held, say, $100,000 in each, for a total investment of $500,000:
Source: CEF Insider
It’s a nightmare ! Your monthly income ranges from just $550 per month to $1,508. And you still only get an overall return of 2.2%! And while switching to other blue chip stocks may get you a higher return, it won’t solve the erratic income problem because very few pay monthly.
But the East an asset class where regular monthly payers abound: closed-end funds (CEFs). Of the approximately 500 CEFs that exist, about 350 pay dividends each month. And because CEFs hold everything from corporate bonds to real estate investment trusts (REITs) and blue-chip stocks, you can probably switch to them without having to sell the stocks you currently own.
In fact, with just three of the CEFs we’ll look at below, you can turn the wobbly 2.2% revenue stream we just saw into a rich 7.7% return as smoothly as possible:
Source: CEF Insider
It’s more like that! And you’ll also be much more diversified, with bonds, utility stocks and blue chips supporting your dividend stream. More on these three monthly paying CEFs in a moment. First, if you’re new to CEFs (and many people are – as I wrote last Thursday, the media is only now beginning to tell investors about these well-established income generators), let’s take a quick look at how it works. CEFs.
CEFs have 3 ways to protect our dividends
CEFs generate their dividends in different ways. For one thing, their human managers trade in and out of all the assets held by their fund, and from time to time they take profits on these trades and return them to us in the form of dividends.
For the past decade, this has been easy to do for a stock-focused CEF. With the market up 14% annualized over this period, it was simple for a CEF manager to maintain, say, a 7% dividend (most equity-focused CEFs pay that much and more).
Another way to offer outsized payouts is to use leverage. This may sound risky, but you can reduce your risk by focusing on CEFs with very conservative leverage, say 20% of their portfolios or less. And even as interest rates rise, the booming economy at the same time inflates the holdings of these funds, and that’s more than enough to offset any rising borrowing costs.
Finally, there is a CEF discount on the net asset value (NAV). We don’t need to go into detail here, but due to a quirk in their structure, CEF stock prices typically trade at a different level from their net asset value, and often at a discount. This means that the market price yield (or the yield we get) is often much higher than the net asset value yield (the yield that management must hedge to maintain the payout).
A CEF like the Gabelli Dividend and Income Fund (GDV), for example, is trading today at a 12% discount to net asset value and yielding 5.3% on its market price. But because of this discount, its yield on NAV is only 4.7%, which is even easier for management to hedge.
Now back to that consistent $3,208 per month income stream we mentioned a few minutes ago. Here is a model portfolio of the three CEFs that can get you there. (Note that these aren’t my favorite monthly dividend buys right now, as their discounts aren’t deep enough to get our blood pumping. For my top 4 monthly paying CEF picks, see the link to the special report I provided at the end of this article.)
A “mini-wallet” of 3 CEF with a stable monthly payment of 7.7%
Base our portfolio on strong utility stocks with Reaves Utilities Income Fund (UTG), payer of a 7.6% yield today. The fund’s holdings generate reliable cash flow through thick and thin as demand for telecommunications, energy and pipeline services remains constant no matter how the economy changes. Top UTG holdings include NextEra Energy (NEE), American Water Works (AWW) and WEC Energy Group (WEC).
Not only does UTG offer this huge yield, but it has steadily increased its payout over the past decade, with a special dividend added for good measure in 2016:
A rare 7.6% payout that increases
Now let’s add the PIMCO Income Strategy Fund (PFL), a small fund from one of the largest bond traders in the world. PFL holds a variety of US and foreign bonds and pays out a whopping 9.4% income.
Next, we will add exposure to real estate through the Cohen & Steers Quality Income Realty Fund (RQI)a 6.1% yield that holds mostly real REITs, with smaller concentrations of corporate bonds, preferred stocks and convertible bonds (which management can convert into stocks under certain conditions).
Top REIT holdings include cellphone tower owner American Tower (AMT), Self Storage REITs Public storage (PSA) and warehouse owner Duke Realty (DUK). All three benefit from consumers’ focus on buying goods (especially online) rather than services, which was of course a pandemic-driven trend (and one that isn’t likely to go away any time soon).
Put it all together and you have that smooth monthly income of $3,208 we talked about earlier. You can use these funds to reinvest in these CEFs and further increase your income stream or invest them elsewhere. This flexibility is what financial independence is all about.
My Top 4 Monthly CEFs to Buy Now (for 7.5% Dividend, 20% Upside)
I combined my 4 Best Monthly Paid CEFs You Can Buy Right Now in a new special report that you can get by clicking here. These 4 overlooked CEFs (for now!) yield 7.5% today, and all scream bargains – to the point I foresee 20% more of all of them by this time next year.
These funds will also help protect your portfolio against shocks: thanks to their already large discounts, they will hold up in the event of a correction, allowing you to enjoy your monthly dividends of more than 7.5% with complete peace of mind!
Your special report, with all the details, awaits you now. Click here to get your copy and find out everything you need to know about these 4 monthly paying CEFs, including their names, tickers, current yields and my in-depth analysis of their management strategies.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.