This levitating stock market is terrible news for anyone who wants to actually retire. That’s because it’s keeping S&P 500 dividend yields in the dumpster, at a hair under 1.9% now.
But there’s a better way—an 8% retirement-survival strategy, to be specific—that’ll earn you $40,000 annually on a $500,000 portfolio. With capital gains upside, to boot.
You read that right.
Most “first-level” investors have no clue the investments I’m going to tell you about even exist. That’s why most folks pile into blue chips, wrongly thinking they’re the ones at fault for not having saved the massive nest egg they need to get a livable income stream.
And when I say massive, I’m not kidding.
At 1.9%, you’d need more than two million dollars just to bring in $40,000 in dividend payouts—the bare minimum many folks would need to retire. And as I’ve written before, retiring on dividends alone is something you need to aim for if you want to safeguard your golden years from market meltdowns.
Your Retirement Rescue Plan
This is where that strategy I just mentioned comes in.
It may surprise you to hear that there are plenty of safe investments out there that will hand us an 8% yield—enough to get us our $40,000 in income on just a $500,000 nest egg.
The trick is to go beyond the S&P 500 and dip into quieter corners of the market—places where the big institutional players don’t bother looking, but are still plenty liquid for you and me.
That’s exactly what my “8% No-Withdrawal” portfolio (which you can read about here) does. And today we’re going to zero in on one of the three asset classes that make it up: closed-end funds—including one CEF that’s a smart buy now.
One Stop for a 9% Yield and Upside
Not familiar with closed-end funds? There are really only three things you need to know about them:
- There are only about 500 CEFs out there, so they’re off the herd’s (and the big guys’) radar … but that’s starting to change.
- You can often swap your “regular” stocks for CEFs holding the exact same names but with one crucial difference: you’ll get an outsized yield—that’s right: I’m talking 8%, 9% and even higher!
- Unlike mutual funds and ETFs, CEFs can’t issue new shares after their IPOs. This means that many of these funds trade at big discounts to their net asset values (NAV; or the value of their underlying holdings).The upshot? Our upside is virtually locked in as those discounts snap back to “normal” levels.
A terrific example: the Liberty All-Star Equity Fund (NYSE:USA), which throws off a gaudy 9.0% dividend yield as I write, or more than 4.5 times what your average S&P 500 stock pays.
How? By using a carefully crafted strategy of buying top-notch stocks when they’re cheap, selling when they’re overvalued and sending the gains out to investors as dividends.
My colleague, CEF expert Michael Foster, pounded the table on USA on May 1, and the fund has gone on to deliver a solid 6.7% total return since then.
Performance Fit for a Patriot
This is why I love CEFs: despite that jump, USA still trades at a 12% discount to NAV. This is basically free money: we’re getting the fund’s top-quality holdings at $0.88 on the dollar!
Granted, that’s less than the 17% markdown you’d have gotten in November, but it isn’t far above the 14.9% average over the last year, so we’re getting an extra layer of price stability as we collect USA’s hefty dividend.
Plus, the fund has traded at discounts as narrow as 1% in the past 10 years, so there’s still plenty of upside here, too.
As the ticker suggests, USA’s holdings are domestic stocks many folks own anyway, making switching over to the fund easy. Check out USA’s top 20 picks:
The Time to Buy Is Now
Before we go any further, there’s something else you need to know: even though they’re still off most folks’ radar, CEFs’ discounts are starting to narrow, meaning that if you want to reap the biggest gains, you need to make a move soon.
The evidence: spiking interest from activist investors, who’ve caught wind of the bargains still available in CEF land and are jumping in, pushing prices higher—and tightening the vice on CEFs’ discounts to NAV.
As Foster wrote in his August 3 article, Saba Capital Management’s Boaz Weinstein is the latest example. Weinstein is famous for making a fortune betting against the London Whale, the JPMorgan Chase & Co. (NYSE:JPM) trader who cost the bank billions. Now he’s making a big bet on CEFs, recently investing a cool $1 billion in these funds.
Activists who prowl the CEF space, like Saba, New York State–based Karpus Management and New Jersey’s Bulldog Investors, typically demand that funds narrow—or eliminate—their discounts by making a tender (or share-repurchase) offer at a price at or near NAV, or even liquidating the fund entirely.
Either play is a boon to shareholders because they get the NAV, not the discounted market price, for their shares.
And make no mistake, we’re just at the beginning of the activist assault, which will bring rising CEF prices, narrower discounts … and fewer funds for us to pick from. Weinstein nicely summed up both the urgency and the benefits of CEFs in a recent interview:
“Although CEF discounts have narrowed in the past year, it’s possible to buy a few dozen of them at an average 10% discount without sacrificing quality,” he said.
“You go into it hoping the discount will narrow on its own, but one of the nicest points about this investment is that while you wait, you earn an above-average yield, given the discounted price.”
I couldn’t have said it better myself.
So if you don’t want to be left on the outside, this is the time to get in. But even though USA is a solid fund, it isn’t your best bet here.
For that, look to….
My Secure 8% “No Withdrawal” Retirement Portfolio
I’ve just rolled out my 3 favorite CEFs in that 8% retirement portfolio I mentioned earlier.
Here’s what you can expect from these 3 “no-drama” income wonders:
- My No. 1 CEF Pick lets you hire one of the brightest investment minds in the business for almost nothing! He also pays us every single month (instead of every quarter)—and our yield works out to a rock-solid 8.4%.
- My No. 2 CEF Pick yields 8.1% and has paid its current distribution every month since 2002! This is one of the most reliable dividends out there, and the fund’s share buybacks give it extra kick by slowly grinding away at its unusual discount. Buy now
- My No. 3 CEF Pick pays 6% today but is set to explode in the next 12 months thanks to its ridiculous 9% discount to NAV. This one has motored through crisis after crisis in its 20+ years of existence and has still left the broader market in the dust.
Now I’m ready to take you inside this one-of-a-kind portfolio and give you everything you need to know about these 3 cash-rich CEFs.
But that’s not all.
Because there’s more to this portfolio than CEFs, such as my favorite fund for investing in preferred shares—ignored investments gurus like Warren Buffett use all the time to haul in outsized dividend yields.
This stealth fund hands you an easy 7.3% yield today, but its best quality is its lack of correlation with the S&P 500. That adds some nice ballast to your portfolio when a market storm rolls in.
You’ll also discover my 2 favorite real estate investment trusts (REITs), including an 8% income wonder that’s raised its payout for 20 quarters in a row!
Living on dividends alone is every investor’s dream, and this is your chance to achieve it. Don’t miss out!