This 7-CEF Portfolio Yields 14.1%
2024.12.20 07:51
The suits on Wall Street will say that $460K isn’t enough to retire on.
Well, that “modest” nest egg will earn $64,860 in dividends alone when invested in this simple 7-CEF portfolio.
CEFs are the code name for closed-end funds. They are a lesser-known cousin to exchange-traded funds (ETFs) and mutual funds. CEFs tend to have modest assets under management. Which is their superpower. Fewer assets mean greater yields!
Consider the 7-CEF portfolio we are about to discuss versus the standard high-yield stock benchmark ETF:
There is no comparison! But before we buy blindly, let’s do our homework and make sure these CEFs are not paper payout tigers. After all, a double-digit yield isn’t much good if it is soon chopped to single digits.
Liberty All-Star Equity Fund (NYSE:) (USA, 10.2% distribution rate) is as much of a straight shooter as we could want. This equity CEF, launched in 1987, provides a 60/40 blend of value/growth through roughly 145 stock picks selected by five teams of managers—three value-oriented and two growth-oriented.
The top of the portfolio will look S&P 500-esque; names such as Microsoft (NASDAQ:), Nvidia (NASDAQ:), and Amazon (NASDAQ:) get top billing, ensuring we’re still getting exposure to tech megatrends like artificial intelligence. But other firms—such as Fresenius Medical Care (NYSE:), S&P Global (NYSE:) (SPGI), and Capital One (NYSE:)—enjoy much more weight than they do in the index.
Despite a value lean, USA is surprisingly competitive.
USA Holds Its Own Against the S&P 500
Importantly, USA isn’t leaning on leverage or options to generate that 10%-plus yield—that’s a combination of income, capital gains, and occasionally, return of capital. USA’s distribution policy is to pay out four quarterly installments of 2.5% of the fund’s net asset value, so payouts will float around a little bit. This does mean that from a pure price-performance perspective, Liberty All-Star doesn’t look nearly as good—but distributions cover that gap.
A small 1.5% discount to NAV doesn’t seem like much compared to other closed-end funds, but that’s common for USA. In fact, its five-year average discount is a mere 0.5%.
I won’t spend much time on Nuveen Floating Rate Income Fund (NYSE:) (JFR, 11.4% distribution rate), which I highlighted in a recent review of double-digit bond ideas, but its massive monthly yield warrants a mention here.
Nuveen Floating Rate Income Fund is a well-diversified portfolio of 430 corporate floating-rate bonds that leans heavily into junk (90% of assets are invested in below-investment-grade debt). Unlike USA, it puts the pedal to the debt metal, using a high 38% leverage to boost its picks—and that has worked in its favor with a wild 25% return over the past year. Just beware: This Nuveen CEF’s discount has all but evaporated.
JFR Now Trades at the Historical High End of Its Price Spectrum
Western Asset Diversified Income (WDI, 12.1% distribution rate), a Franklin Templeton CEF, holds a wide array of debt investments. Commercial junk is the anchor of this fund, at about 40% of the portfolio, but WDI also provides exposure to collateralized loan obligations (CLOs), bank loans, commercial mortgage-backed securities (MBSs), investment-grade credit, emerging-market sovereigns, asset-backed securities (ABSs) and more. And this CEF also boasts access to private debt “not typically available through traditional mutual funds.”
Credit quality is low, and leverage is high, resulting in a spectacular 12%-plus annual rate on its monthly distribution—and an interesting history for this relatively young fund (inception June 2021):
A Tough Start, But WDI Is Looking Up
There’s not much history here, valuation-wise, but its current 4% discount is slimmer than its three-year average (9%). Also note that WDI is a term trust that will liquidate on or about June 24, 2033.
Another term-limited CEF with a wild yield is the BlackRock Innovation and Growth Term Trust (NYSE:) (BIGZ, 13.4% distribution rate). This fund buys predominantly mid- and small-cap companies that are, well, “innovative” and that management believes have better-than-average earnings growth potential. Holdings include the likes of Taser maker Axon Enterprise (NASDAQ:) and tech electrical infrastructure firm Vertiv (NYSE:), but also private investments (which it folds under cryptic names like “Project Picasso”).
Obviously, these innovative companies aren’t paying out dividends. Instead, BIGZ generates income by selling covered calls within the portfolio. Distributions have historically been entirely return of capital. And these big distributions are effectively mandated—BIGZ has a managed distribution plan that requires it to pay out 12% of its 12-month average NAV through at least September 2025.
BIGZ is also subject to a discount management program. If this CEF trades at a discount greater than 7.5% during any of four three-month measurement periods, the fund will offer a repurchase of 2.5% of its outstanding common shares at a valuation of 98% of NAV. This program will run through March 31, 2025, and could be extended by the fund’s board. From publicly available info, it looks like BIGZ could hit that mark for the Oct. 1-Dec. 31 measurement period, and it currently trades at a nearly 11% discount to NAV.
Just remember: “Discount” does not mean “value.” BIGZ’s strategy has been a disaster so far. While the fund is at least on an upswing now, it’s still undershooting a basic tech index.
BIGZ, But Little $
We can get our dividends from around the globe, too. And few international funds offer a yield as scintillating as The India Fund (NYSE:) (IFN, 13.7% distribution rate).
No options, and no leverage here. IFN is a straightforward Abrdn equity fund with a singular focus on the world’s second-largest country. It’s a tight portfolio, with just 45 components. Financials, such as ICICI Bank (NYSE:) and HDFC Bank (NYSE:), have long been prominent and currently make up a quarter of the portfolio. They’re followed by roughly 10% allocations in industrials and information technology.
Again, distributions here are rarely made of dividend income—here, they’re almost always capital gains. But investors should have no complaints:
The India Fund Is THE India Fund
One last note on IFN: It’s trading at a roughly 11% discount to NAV. While this is in line with its historical norms, it’s a welcome departure from the past couple of years, which saw IFN trade at slimmer discounts and even premiums at times.
Abrdn Income Credit Strategies Fund (NYSE:) (ACP, 15.7% distribution rate) is a global corporate junk fund. Roughly 30% of assets are invested in U.S. high-yield, with the remaining 70% scattered across the U.K., Luxembourg, Germany and more.
Maturities are in line with comparable index funds—85% in 0-5 years, and most of the rest in 5-10 years. Credit quality is junkier, though, with 60% of assets in B-rated bonds and 23% in CCC-rated debt. (It shows, too—the monthly dole has dropped twice since 2020.)
Leverage is moderate at close to 15%, but this is still an aggressive fund that rides like a roller coaster. That leads to mixed productivity, but ACP can be useful over shorter time periods. Currently, this CEF might be nearing one of those useful inflection points, as its discount to NAV has widened to about 9%—well above its five-year average discount of just 1%.
We Either Catch a Ride Higher, Or Catch a Falling Knife
Investors seeking out a more complete portfolio will find that in the BlackRock (NYSE:) Capital Allocation Term Trust (NYSE:) (BCAT, 22.1% distribution rate), another term trust that will dissolve on or about Sept. 27, 2032. They’ll also find one of the highest yields on Wall Street—a fat 20%-plus distribution that has already improved twice since the fund launched in 2020.
BCAT is an allocation fund that provides a roughly 55/45 split of stocks and bonds. It uses little leverage (5%), but it does sell covered calls—generating a boatload of income, though the end result is that the lion’s share of distributions end up being return of capital.
This CEF struggled mightily in its first two-plus years of trading, but it has fared much better during the second post-COVID bull market.
A Harder Path to Moderate Gains
The turnaround is a welcome one for shareholders, though most might be second-guessing just how much stability this balanced portfolio can really provide. BCAT belongs to the same discount management plan as BIGZ, and has a managed distribution plan that requires it to pay out 20% of its 12-month average NAV through at least September 2025. How long BCAT will continue to enjoy these support programs is unknown.
And would-be investors get to wonder what’s next from this Jekyll-and-Hyde fund, whose meteoric run has also narrowed the discount from nearly 20% in 2023 to just 6% today.
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.”
