3 CEFs That Could Pay You $50,000 a Year
Contrarian Outlook | Mar 13, 2023 05:37AM ET
Not many people realize this, but there’s an easy way to build a reliable 10% dividend stream (with price upside) that crushes anything stocks—or an index fund—could pay you.
I know that’s a bold claim. Truth is, ETFs are practically a religion for many folks. And it’s true that many active fund managers do fail to beat the index in stocks in any given year.
But there are also quite a few who do beat the index. Plus, many of them do it by offering a much bigger yield than the 1.8% your typical S&P 500 index fund, like the Vanguard S&P 500 ETF (NYSE:VOO), yields.
Those superstar managers—and their big dividends (the three funds I’m going to show you below do indeed yield 10% on average)—can be found in the world of closed-end funds (CEFs).
CEFs: The Same Big-Name Stocks as ETFs, With 5X the Income
CEFs are (too) often overlooked assets that yield 8.1% on average now. And if you dig through the 500 or so CEFs out there, you can find strong picks with 10% yields that have been around for years, proving their reliability. (We’ll do just that in a moment.)
And since CEFs own stocks and bonds from big companies like Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), and Amazon (NASDAQ:AMZN), we’re not building up an income stream on a shaky foundation. No, this is about as mainstream as it gets.
This chart clearly shows the benefits of going with CEFs over ETFs when planning for retirement: if you stick with VOO, you’ll need $5.6 million in savings to get a $100,000 annual income stream. But turbocharged CEFs get you $100,000 in annual passive income with less than a fifth of the capital.
And if you’re convinced no fund can match VOO’s long-term performance with that high yield, let me show you just one of the three double-digit yielders we’ll discuss next, the Liberty All Star Equity Closed Fund (NYSE:USA), outran VOO over the last five years:
USA Beats Its Index—With Most of Its Return in Cash
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The crucial part here is that thanks to its high yield (9.8% currently), the USA delivered the lion’s share of the return above in dividend cash. So we’re not trading income for lower overall returns here. And with the three years we’ve just put in, I think you’ll agree that the more of our return we can get in safe dividend cash, the better!
h2 CEF Pick No. 1: Liberty All-Star Equity Fund (USA)/h2Now let’s look at how we’ll build our three-fund portfolio. For stock exposure, we’ll start with the USA, which we just touched on above. This fund is run by Liberty Funds, which has been around since the 1980s. It holds blue chips like Microsoft, Visa (NYSE:V), and the insurer UnitedHealth Group (NYSE:UNH).
That makes USA our best “ETF proxy,” except instead of 1.8%, we’re getting 9.8%! Moreover, the USA is fairly valued at a 2% premium to NAV (meaning its per-share market price is just a hair over the per-share value of its portfolio holdings).
I say the USA is fairly valued because it has traded as high as a 10% premium in the last year, a level that looks attainable now that we’re nearing the end of the Fed’s rate-hike cycle.
h2 CEF Pick No. 2: Western Asset Diversified Income Fund (WDI)/h2WDI is a bond fund (with a slice of low-volatility preferred shares) that yields 11% today. Its management firm, Franklin Templeton, has deep connections in the bond market thanks to its enormous size, with $1.5 trillion in assets under management.
The fund trades at an 8% discount as I write this, giving us an opportunity to lock in that high yield—the result of the hit bonds took last year as interest rates soared—at an attractive price.
WDI holds bonds issued by large-cap US companies. Its 298 holdings and $1.18 billion in assets give us an extra layer of safety against default risk (especially when you consider that the bond-default rate in the US is only around 2% on its own).
All of the above makes WDI a great pick for diversification inside an income-focused retirement portfolio.
h2 CEF Pick No. 3: CBRE Global Real Estate Income Fund (IGR)/h2Our final pick, CBRE Clarion Global Real Estate Income Fund (NYSE:IGR), is a solid selection for real estate exposure. The fund yields 11% today and is managed by CBRE Investment Management, the largest commercial real estate business in the world, with a staff of over 100,000 in more than 100 countries.
IGR gives you instant exposure to some of the largest real estate investment trusts (REITs) in America. Top positions include data-center owner Equinix (NASDAQ:EQIX), dominant industrial landlord Prologis (NYSE:PLD), and mall owner Simon Property Group (NYSE:SPG).
Better still, with IGR we can buy at an 8.1% discount, so we’re essentially getting these REITs for 92 cents on the dollar. And since its average discount over the last year has only been 4.9%, we’ve got some nice discount-driven upside to look forward to here, as well.
Summing Up: Our CEF Trio Delivers Strong Income and Outperformance
Now that we’re well into 2023, let’s wrap by looking at how these three funds have performed so far this year. As you can see below, USA (in orange), WDI (in blue), and IGR (in green) have all outrun the index fund VOO (in purple).
High-Income CEF Show Their Strength
With a bigger yield, better diversification, and a dividend yield over 5 times larger than that of the typical S&P 500 stock, this 3-fund portfolio has a lot to offer if you’re planning for retirement—or if you just want to draw an income stream from your investments.
Disclosure: Brett Owens and Michael Foster are contrarian income investors who look for undervalued stocks/funds across the U.S. markets. Click here to learn how to profit from their strategies in the latest report, "7 Great Dividend Growth Stocks for a Secure Retirement ."
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