Products You May Like
I know I don’t have to tell you it’s tough (and very frustrating) trying to get any kind of income stream from your savings these days.
The average S&P 500 stock yields just 1.9%. That’s not even enough to cover inflation!
Treasuries? The 10-year note yields an almost equally pathetic 2.3%.
But there are still safe 7%+ dividends to be had—even in the “income desert” we’re living in now. I’ll show you three funds yielding up to 8.5% (more than 4 times the typical S&P 500 yield) in a second.
Dividends like those can let you clock out on a nest egg that’s far smaller than advisers say you need. I’m talking $550K—and maybe less. Here are two simple strategies for pulling it off:
- Go contrarian: Buy safe, 7%+-paying funds when they’re out of favor (I’ll give you a simple way to determine this shortly) and hold them through any market.
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“No Withdrawal”: We’ll build a portfolio that can let you retire on dividends alone. Because when you’re pulling in, say, a 7.5% average yield, you can generate a $40,000 income stream on just a $550K nest egg.
For many folks, that’s enough to punch out, collect their dividend checks and ignore the market’s daily swings altogether!
Better yet, I’ve done the work for you.
Here are three overlooked funds yielding up to 8.5%. All three are what I call “pullback proof”: they hold the line during corrections like the “May massacre” we just saw.
High-Yield Pick No. 1: A “Preferred” 7% Dividend Paid Monthly
My first fund holds preferred shares, which are a perfect substitute for the “common” shares you probably own today.
A company’s preferred stock usually pays a much higher dividend than the “common” shares most folks buy. So by simply “trading in” your common shares for preferreds, you can double (or more) your income stream while still investing in the same company.
The tradeoff is usually less upside, but if you buy your preferreds through a well-run closed-end fund (CEF) —which I recommend—the cash return from your dividends can be so high you might not even notice.
Consider the Flaherty & Crumrine Total Return Fund (FLC) (payer of a monthly 7% dividend): it’s delivered a 214% total return (including dividends) since inception in 2003, driven by its huge cash payouts!
Finally, let’s talk upside.
With CEFs, the key number to watch is the gap between the fund’s market price and the value of the assets in its portfolio, known as the net asset value, or NAV.
As I write this, FLC’s discount stands at 4%, and it’s traded at narrower discounts (and even hefty premiums) over the last five years, so we can look forward to price gains as that discount creeps ever closer to par—and beyond.
High-Yield Play No. 2: A Top REIT Fund Yielding 7.1%
If your portfolio is low on preferreds and real estate investment trusts, you can grab both in one buy with the Cohen & Steers REIT & Preferred Income Fund (RNP).
RNP has crushed both the S&P 500 and the REIT benchmark Vanguard REIT ETF (VNQ) since inception in 2004—no mean feat for an income play like this.
And thanks to its huge dividend (current yield: 7.1%), a huge slice of that gain was in cash.
This fund taps its REIT holdings (51% of the portfolio) and preferred stocks (49%) to give us that steady 7.1% dividend (also paid monthly). And as with FLC, RNP has held up nicely this past month.
Also like FLC, it fell far less than the market during last fall’s correction, and bounced back faster, handing investors a nice 10% return.
Finally, you can grab this one at an 8.5% discount to NAV, a discount that can’t last, considering RNP’s “no-drama” approach and long history of crushing the S&P 500.
High-Yield Play No. 3: An 8.5% Dividend With Upside
The Western Asset High Income Fund II (HIX) is a high-yield bond fund with a long history of strong performance, having tripled in value (including dividends) since its IPO in the late 1990s, crushing the S&P 500.
HIX gives investors that strong return while yielding 8.5%. Management firm Legg Mason, which has been in the fixed-income business for 48 years, generates HIX’s 8.5% dividend through a portfolio that includes emerging-market bonds, high-yield corporate bonds, investment-grade corporates, bank loans and a small cash holding.
That high total return and consistent share-price performance make HIX worth your attention at any time, but now that it’s trading at a 9% discount to NAV, it’s particularly compelling.
That’s because the fund has traded near (or even above) par with its NAV for months on end in the past. So if you buy HIX now and wait for its discount to evaporate, you’d be looking at 9.9% gains on top of your 8.5% dividend stream.
Disclosure: none