Readers often ask me how to build a portfolio that holds its own in down times but hands them more income than the measly 2.6% long-term US Treasuries pay.
So today I’ll show you how to do that. With the 4 bargain-priced closed-end funds (CEFs) I’ll show you below, which also boast strong track records and high income streams, you can keep the dividends flowing, regardless of the market’s tantrums.
An added plus? Your nest egg will be spread across asset classes, giving you extra protection.
Buy No. 1: A Buffett-Friendly CEF With Big Upside
With a long-term average total return of around 8.5% per year, US stocks need to be at the heart of any income portfolio. And the beauty of closed-end funds (CEFs) is that you can get a return like that, along with a large cash stream you can reinvest or use to pay your bills.
Start with the Boulder Growth & Income Fund (BIF), which trades at a 15.3% discount to net asset value (NAV, or the value of its underlying portfolio), despite its large exposure to Warren Buffett’s Berkshire Hathaway (BRK) and several other high-quality value and growth companies. That exposure has resulted in BIF’s NAV doing this in the last 3 years:
A Strong and Steady Return
Another great thing about BIF is that, thanks to its value-investing principles, it can bounce back from a recession faster than the S&P 500, as we saw in 2007-09:
A Quick, Sustained Recovery
And since BIF gives you a 3.7% dividend stream, versus the 0% Berkshire pays, you can harness the power of value investing without sacrificing income with this fund.
Buy No. 2: Big Yields From Safe Utilities
But let’s go for even more income and security with the 6.3%-yielding Gabelli Global Utility & Income Trust (GLU), which has a massive 9.7% discount to NAV that has opened up only in the last 6 months:
A Buy Window Opens
This has created a buying opportunity for a fund that hasn’t cut its dividend since its IPO over a decade ago—something only a select few CEFs can say.
The result? Steady income through thick and thin, with limited downside, thanks to GLU’s huge discount. That should make income investors happy no matter what the economy does.
Buy No. 3: Muni Bonds for Low-Stress, Tax-Free Dividends
Municipal bonds are a great way to get a large income stream no matter the economic climate, because they have a government guarantee and one of the lowest default rates in the world—less than 0.01%!
A big problem with many muni CEFs, however, is that they each tend to focus on one state, and bad news hitting that state can hit these funds’ values quickly, even if the fund’s fundamentals remain strong.
That’s why a nationally diversified and deeply discounted fund, like the DTF Tax-Free Income Fund (DTF), makes sense for our 4-fund portfolio. This fund doesn’t have more than 15% of its assets in any one state, and its top holdings (issues by Florida and California) are from states seeing rising population growth and higher per-capita income, resulting in improving budget conditions:
Source: Duff & Phelps Investment Management Company
That diversified portfolio helps secure the fund’s 4.5% dividend yield, which is tax-free at the federal and state levels for many Americans.
Plus, DTF’s strong management team has driven the fund to far outperform the muni-bond index fund, the iShares National Municipal Bond ETF (MUB), which so many investors depend on, despite its pathetic 2.4% dividend yield:
Beating the Index by a Wide Margin
DTF’s outperformance and strong income stream should come at a premium; instead, the fund trades at a 12.3% discount to NAV! That’s far below its 6.7% average discount over the last decade, and it makes DTF a great, safe buy for muni exposure. And since it has over 150 issues from 32 states, this fund alone gets you the diversification you need.
“Instant Portfolio” Buy No. 4: 7.4% Dividends From Quality Corporate Bonds
Finally, let’s round out our portfolio with corporate bonds for reliable income. We can do that with the Western Asset Global Corporate Defined Opportunities Fund (GDO). With an 8.7% discount to NAV and a 7.4% dividend yield, this is a rare treat for an income lover—especially since it’s been crushing the index fund for nearly a decade. (See a pattern here? Index-busting CEFs are everywhere.)
Trouncing the Index Again
GDO’s recent price slide handed us that nice discount (it was trading at a 5.5% discount at the start of 2018). That markdown also means the fund’s dividend will be more sustainable going forward, because while the yield on its share price is 7.4%, the yield on its underlying NAV is a significantly lower 6.8%.
That’s a significantly lower figure, and it’s the one that really matters when it comes to dividend reliability. So we can look forward to enjoying GDO’s outsized dividend stream and some nice price upside here, to boot.
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