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, 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 (NYSE:SPXX) (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 (NASDAQ:MSFT), Apple (NASDAQ:AAPL), Visa (NYSE:V), Bank of America (NYSE: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 (NYSE: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 have 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 (NYSE:AMT), warehouse giant Prologis (NYSE:PLD) and data-center landlord Equinix (NASDAQ: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 (NYSE: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.
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.
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."