Achieve a Retirement Fund of $460,000 by 2025 Through a Straightforward 7-Fund Investment Plan
Wall Street bigwigs might argue that $460K isn't sufficient for a comfortable retirement. However, this "modest" savings would Produce a staggering $64,860 in yearly dividends if invested in this 7-CEF collection.
CEFs, the hidden gems of the investment world, are the nickname for closed-end funds. These lesser-known relatives to ETFs and mutual funds usually have fewer assets under management, making them quite potent.
Let's compare our 7-CEF collection to the standard high-yield stock benchmark ETF:
There's no contest! But before you dive in, it's crucial to verify that these CEFs aren't hiding high-risk payouts. After all, a double-digit yield wouldn't be beneficial if it quickly plummeted to single digits.
USA Outperforms the S&P 500
Liberty All-Star Equity Fund (USA, 10.2% distribution rate) is as reliable as they come. This equity CEF, established in 1987, offers a 60/40 blend of value/growth through about 145 stocks selected by five management teams.
The top portion of the fund resembles the S&P 500; giant names like Microsoft (MSFT), Nvidia (NVDA), and Amazon (AMZN) hold prime positions, ensuring we remain connected to tech megatrends like artificial intelligence. But other companies, such as Fresenius Medical Care (FMS), S&P Global (SPGI), and Capital One (COF), hold considerable weight than they do in the index.
Despite its value-oriented tilt, USA competes strongly.
Crucially, USA relies on income, capital gains, and occasional return of capital to generate its 10%-plus yield—not excessive leverage or options. USA's distribution policy is to pay out four quarterly installments of 2.5% of the fund's net asset value, so payouts may vary slightly. This means that from a flat price-performance standpoint, Liberty All-Star may not appear as appealing—but distributions make up for it.
A small 1.5% discount to NAV is customary for USA. In fact, its five-year average discount is a paltry 0.5%.
JFR Approaches Historical Price Peak
I won't dedicate much space to Nuveen Floating Rate Income Fund (JFR, 11.4% distribution rate), which I previously highlighted in a piece on high-yield bond ideas, but its eye-popping monthly yield warrants a mention.
Nuveen Floating Rate Income Fund is a diversified mixture of 430 floating-rate corporate bonds, with 90% of assets invested in sub-investment-grade debt. Unlike USA, it utilizes a high 38% leverage to amplify its picks—and this strategy has paid off, delivering a remarkable 25% return over the previous year. One significant disclaimer: JFR's discount is now close to disappearing.
WDI Tries to Get Back on Its Feet
Western Asset Diversified Income (WDI, 12.1% distribution rate), a Franklin Templeton CEF, boasts an extensive assortment of debt investments. Commercial junk bonds comprise around 40% of the fund, but WDI also grants exposure to collateralized loan obligations, bank loans, commercial mortgage-backed securities, investment-grade credit, emerging-market sovereigns, asset-backed securities, and more. And like other CEFs, WDI provides access to private debt, a perk not often available through traditional mutual funds.
Credit quality is low, and leverage is high, resulting in an impressive 12%-plus annual yield on its monthly distribution—and an intriguing history for this relatively new fund (inception June 2021).
The fund's short history is scant in terms of valuation, but its 4% discount is less extensive than its three-year average (9%). Also, note that WDI is a term trust that will liquidate on or about June 24, 2033.
BIGZ Offers High Yield, But Small Fund Size
Another term-limited CEF featuring a hefty yield is the BlackRock Innovation and Growth Term Trust (BIGZ, 13.4% distribution rate). This fund primarily invests in mid- and small-cap firms, which management thinks have better-than-average earnings growth potential. Portfolio holdings include techie companies like Axon Enterprise (AXON) and Vertiv (VRT), as well as private investments, some of which are named under cryptic titles like "Project Picasso."
As these innovative companies do not offer dividends, BIGZ creates income by selling covered calls within the portfolio. Historically, distributions have been entirely return of capital. And these substantial distributions are effectively enforced—BIGZ has a managed distribution plan that mandates it to pay out 12% of its 12-month average NAV through at least September 2025.
BIGZ is included in a price reduction scheme. If this ETF trades at a reduced price of over 7.5% during any of the four three-month monitoring periods, the fund will offer to buy back 2.5% of its existing common shares at a valuation of 98% of the net asset value (NAV). This program will continue until March 31, 2025, and may potentially be extended by the fund's board. It seems that BIGZ may reach this threshold for the October 1 to December 31 measurement period, and currently trades at a nearly 11% reduction compared to the NAV.
"Discount" does not imply "value." BIGZ's approach has not been successful up until now. Although the fund is currently on an uptrend, it still falls short of matching a standard tech index.
The India Fund is generally recognized as The India Fund (IFN). We can acquire dividends from various places worldwide. One of the few international funds providing such an enticing yield is The India Fund (IFN, 13.7% distribution rate).
This fund does not provide options or leverage. IFN is a straightforward equity fund focusing on Abrdn and the world's second-largest country, India. The portfolio is slim with just 45 components. The financial sector, including ICICI Bank (IBN) and HDFC Bank (HDB), has been a consistent presence in the portfolio, accounting for approximately a quarter of it. They are followed by approximately 10% allocations in industries and information technology.
Investors are usually rewarded with capital gains instead of dividend income with IFN. Nonetheless, there's no reason to complain.
As for IFN, it currently trades at a nearly 11% reduction compared to the NAV. Although this is in line with its historical norms, it is a positive change compared to the past few years, during which IFN traded at smaller discounts and even premiums at certain times.
We face a choice between jumping on the bandwagon or getting impaled on a falling knife. Abrdn Income Credit Strategies Fund (ACP, 15.7% distribution rate) is a global junk bond fund with approximately 30% of assets invested in U.S. high-yield, with the remaining 70% scattered across the U.K., Luxembourg, Germany, and other countries.
The maturities match those of comparable index funds – 85% are within 0-5 years, with most of the rest falling between 5-10 years. The creditworthiness is worse than typical index funds, with 60% of assets in B-rated bonds and 23% in CCC-rated debt. (This is evident in the monthly payouts, which have decreased twice since 2020.)
Leverage is not excessive, reaching near 15%, but this is still an aggressive fund that behaves like a roller coaster. This results in mixed productivity but can be useful over shorter time periods. Presently, this CEF may be approaching one of those beneficial turning points, as its discount to the NAV has been increased to approximately 9%, well above its five-year average discount of only 1%.
Investors interested in a more diverse portfolio can find it in BlackRock Capital Allocation Term Trust (BCAT, 22.1% distribution rate), a term trust set to expire on or about September 27, 2032. They will also discover one of the highest yields on the stock market – a fat distribution of over 20%. This yield has already improved twice since the fund's inception in 2020.
BCAT is a balanced allocation fund that provides approximately a 55/45 split of stocks and bonds. It uses a small amount of leverage (5%) but sells covered calls – yielding a significant income amount, although the majority of the distributions are eventually return of capital.
BCAT struggled in its early years as a trading fund but has performed better during the second post-COVID bull market. The improvement is a relief for shareholders, although some may question the true stability that this balanced portfolio can provide. BCAT shares the discount management plan with BIGZ, requiring it to pay out 20% of its 12-month average NAV through at least September 2025. The length of time BCAT will continue to enjoy these support programs is uncertain.
And potential investors will ponder what's next for this Jekyll-and-Hyde fund, whose remarkable growth recently reduced the discount from nearly 20% in 2023 to just 6% today.
Brett Owens is the Chief Investment Strategist for Contrarian Outlook. For additional impressive income concepts, be eligible to receive his latest free special report: Your Early Retirement Portfolio: Huge Dividends—Every Month—Forever.
Disclosure: none
Despite the argument that $460K might not be enough for a comfortable retirement, investing in the right CEFs can yield significant income. For instance, a modest savings of $460K could generate an annual income of $64,860 if invested in a collection of 7 closed-end funds (CEFs).
Investing in CEFs, often referred to as closed-end funds, can be a lucrative strategy for high yield funds and retirement income. These funds, like the Liberty All-Star Equity Fund, provide a blend of value and growth stocks, thereby catering to dividend investing.
The Liberty All-Star Equity Fund, with a 10.2% distribution rate, is a prime example of a reliable CEF. It offers a blend of value and growth stocks and has a history of generating a substantial yield without relying on excessive leverage or options.
