Happy senior man communicating with his friends while walking in autumn day.
getty
I hate to see investors (particularly retirees) starving for dividends, especially with inflation stuck around 3% (and you and I both know that the real number is higher—just head down to your local grocery store!).
A big myth around dividends is that you have to invest a lot upfront to get anything meaningful in return. It’s easy to see why people feel that way, with the average S&P 500 stock paying a meager 1.1% as I write this.
This is where my favorite investments, closed-end funds (CEFs), come in. Using the three we’ll delve into below, you could get a little over $1,000 a month in income, thanks to their double-digit yields.
What’s more, this three-fund portfolio mixes stocks and bonds to get us some nice diversification (and the downside protection that comes with it). Let’s start with bonds.
“Forever Income” Pick No. 1: A Bargain Bond Play Yielding 12.4%
The KKR Income Opportunities Fund (KIO) holds over 300 bonds and other loans issued by the likes of JetBlue Airways (JBLU) and United Airlines Holdings (UAL), chemical maker Chemours Co. (CC), Virgin Media and consulting firm Kroll.
KIO takes the interest it collects and flips it to investors in the form of that hefty 12.4% dividend. Moreover, nearly all of its bonds are below-investment grade. That’s more of an opportunity than a risk, because that’s where the highest yields, and best bargains, are.
Moreover, KIO has been around for over a decade and—despite rising interest rates, a pandemic and other turmoil—has steadily increased its net asset value (NAV, or the value of its underlying portfolio) in that time.
All of that suggests KIO can keep delivering its high yield. Moreover, it has a 6.7% discount to net asset value (NAV, or the value of its portfolio), so there’s gain potential if that discount shrinks, or flips to a premium, as it did just last year.
In other words, you can pick up KIO, wait for its discount to shrink, then sell at a profit. And you get to collect that sweet dividend in the meantime.
“Forever Income” Pick No. 2: An “All-American” Fund Paying 11.3%
Now let’s add stocks through the Liberty All-Star Equity Fund (USA), a CEF holding well-known firms like AI stars NVIDIA (NVDA), Microsoft (MSFT) and Amazon.com (AMZN).
Even so, this fund is nicely diversified, and management has smartly bought and sold its holdings to drive a big jump in its portfolio, or NAV, since the April selloff.
This return is more than enough to cover the fund’s dividend, which yields 11.3% annualized. That return should be rewarded with a premium valuation, yet USA not only trades at a discount, but its discount has widened, creating a rare buying opportunity.
USA Discount to NAV
Ycharts
USA hasn’t been this cheap since the pandemic! When investors see that they can get NVIDIA, Microsoft and more at a near-10% markdown, expect them to drive this fund’s price up. Buy now and you can get the fund’s huge dividend while you wait.
(Though we should note that the fund’s dividend does “float” a bit—which is a good thing: It gives management the opportunity to pick up bargains in a selloff, potentially boosting our long-term gains.)
With stocks and bonds together, and an average 11.9% yield between our first two funds, we already have a great portfolio that can withstand years of market volatility. But we’re not done yet.
“Forever Income” Pick No. 3: A Short-Term Play for 12.8% Energy Dividends
Let’s wrap by adding energy stocks through the NXG Cushing Midstream Energy Fund (SRV). Its 12.8% yield is the biggest of our trio, but its pricing chart is different.
SRV Premium to NAV
Ycharts
With a 2.5% premium, SRV is priced right around where its portfolio’s true value lies. And note how the fund’s market pricing has been rangebound in the last couple years, hovering around par.
That’s after SRV traded at an absurd post-pandemic discount, when energy demand wasn’t rising quickly, while at the same time, technology was making energy production easier, causing a surplus.
Now, with AI, the story is different: Technology is driving energy demand higher, far beyond the degree to which it’s making energy production easier. Those power prices are likely to stick around, which is why SRV has been priced higher of late.
This makes SRV a great fund for shorter-term action; collect the 12.8% dividend, sure, but be prepared to sell if the fund’s premium rises much beyond 5%. Then you can use your returns to buy USA, KIO or another oversold CEF.
Then, when that fund gets overbought, sell it at a profit after collecting your dividends and use that to buy another high-yielding CEF.
That’s the beauty of CEFs, and in particular CEFs’ discounts to NAV, which tell us exactly when a fund has reached a peak valuation.
And then, of course, there are the dividends: As mentioned, the three-fund mini-portfolio we just discussed starts you off with over $1,000 per month in income for every $100K you invest. But over time, you can expect your portfolio to grow—and its income potential to keep rising as it does.
Michael Foster is the Lead Research Analyst for Contrarian Outlook. For more great income ideas, click here for our latest report “Indestructible Income: 5 Bargain Funds with Steady 10% Dividends.”
Disclosure: none
#Invest #100K #Funds #Beat #Inflation #Lifetime