Traditional investors are stuck with cheesy dividend ETFs that pay meager returns below 3%. But we upsets can grab hold of ourselves a lot more dividend cash with a “switch” in our portfolio which more than doubles our yield, to 6.6%!
We will also be fully diversified, with bonds, S&P 500 stocks and real estate populating our holdings, for a total of 703 investments. And they’re all handpicked by expert fund managers who assess credit and interest rate risk for us.
In addition, this “6.6% retirement solution” is more expensive on the rise! The 3 Battleship Funds we’ll cover below are meant to grow as they pay out their dividends no matter what the market is doing.
The inner story of our instant “double the dividend”
Think for a second about the typical investor situation. They probably own a mix of bonds, stocks and real estate, the “big 3” drivers of most people’s wealth.
The problem? All three are bad income generators!
Let’s start with stocks: Right now, the benchmark S&P 500 SPDR S&P 500 ETF Trust (SPY)
To be sure, stock dividends are nearing their lowest level in 20 years, as the rebound from the March 2020 mess crushed returns (as yields and prices move in opposite directions). But let’s be honest: the only times you’ve been able to get a decent return from the S&P 500 or the Dow Jones is if you had the nerve to buy when the market was on fire!
But that doesn’t mean we should give up on blue chips! Because the truth is, nothing else can surpass them for growth. We just want more of our dividend return.
Which brings us to the three “dividend swaps” that will give us the 6.6% payout I mentioned earlier. To show you how much extra money these three funds – closed-end funds (CEFs), to be precise – are giving us, we’re going to turn them into a $ 750,000 portfolio that will allow us to retire. on dividends only.
That’s a lot less than the million dollars most advisors say they need. And in fact, thanks to these big returns, many people may be able to retire on a lot less.
“Dividend swap” # 1: “X” marks room for cash payments of 6.4%
Our first stop is a CEF called the Nuveen Dow 30 Dynamic Overwrite Fund (DIAX) –just DIA with an “X” at the end.
DIAX owns the shares of the Dow Jones Industrial Average, such as Microsoft
It’s a huge difference from DIA. Let’s say we divide our $ 750,000 portfolio in three ways between stocks, real estate and bonds. In this case, our $ 250,000 of shares earns us $ 16,000 per year in dividends with DIAX, compared to $ 4,000 with DIA.
That’s an extra $ 12,000 just for adding an “X” to DIA’s TTY!
Now you to do losing some potential here, due to the fact that some of DIAX’s holdings will be sold and ‘recalled’ as they grow. But if we are heading into retirement (or are retired), we will gladly accept this deal in return for the massive dividend!
Additionally, we should see further upside as DIAX’s 4% discount to the net asset value (NAV, or the value of stocks in its portfolio) inevitably disappears.
“Dividend Swap” # 2: The God of Bonds Reigns Over Everything (and pays us 7.4% in cash)
Now that we have increased the dividend income on our nest egg by $ 12,000, let’s improve it even further on the bond side as we invest our next $ 250,000.
These days, holding high yield corporate bonds makes a lot of sense. Corporations earn much more than 10-year Treasuries, with the SPDR Bloomberg Barclays High Yield Bond ETF (JNK)
pay 4.4% today, compared to 1.3% for the 10-year.
We can do even better with our next CEF, the DoubleLine Income Solutions Fund (DSL), payer of a dividend of 7.4% which falls on our account monthly.
DSL is managed by the “god of the link”, Jeffrey Gundlach. It’s called that because its consistent outperformance tore the bond crown away from former PIMCO manager Bill Gross many years ago.
Gundlach and his team travel the world in search of the best bond deals. No wonder three of their top five holdings are overseas offerings that we mere mortals cannot access. Oh, and they have coupons over 7%!
This access, by the way, is why we want an actively managed fund when we buy companies. Because having a pro like Gundlach picking our bonds means we’re almost certain to beat JNK in just about any time frame.
This is certainly the case since we added DSL to the portfolio of my Contrary income report service in April 2016. Since then he has offered us a net return of 75% in earnings and dividends, compared to just 44% for JNK. And this return is net of costs!
Of course, we have to pay for Gundlach’s expertise – DoubleLine’s fee is 2.28% of the assets (including interest on the reasonable amount of leverage DSL employs – Gundlach borrows against 28% of the wallet).
It seems high. But that doesn’t really matter to us because the return I just mentioned is net of fees, as are all the feedback I give you. I don’t know about you, but I’m willing to pay a little more in fees if I’m pretty sure to outperform the benchmark!
And the fee story improves: DSL trades at a 3.6% discount on NAV, way more than DSL fees, so we basically get Gundlach talent for free!
If you keep the score, we’ve now gone through two-thirds of our $ 750,000 CEF-funded portfolio (with $ 500,000 invested so far) and are already collecting $ 34,500 in income, compared to $ 15,000 for the ETF version. So let’s move on to our final choice.
“Dividend exchange” n ° 3: triple your real estate income in 1 purchase
When it comes to investing in real estate, most people think of rental properties. The problem is, your actual returns are often paltry once you factor in your costs (not to mention the time you have to spend finding tenants, unplugging toilets, and chasing rent checks). .
Wall Street, of course, is happy to provide a solution in the form of the Vanguard Real Estate ETF (VNQ)
The problem is, VNQ only returns 2.2%, which is sad considering that REITs are go-through entities: they take enough of the rent to keep the lights on and the buildings in order, then give us the rest in the form of dividends.
This is where a CEF like the Cohen & Steers Quality Income Realty Fund (RQI) stands. He owns many of the same REITs as VNQ, but with one key difference: dividends! As of this writing, RQI pays 6%, which is almost triple the payment from VNQ and, like DSL, it gives us that money back every month!
And let’s talk about performance: Cohen & Steers are among the top CEF gaming management companies, and they’ve guided RQI to an 86% total return over the past five years, crushing VNQ in the process.
Even with this gain, we can get the RQI back at a discount today – it’s trading just over 4% below NAV as of this writing.
Final Score: CEFs beat ETFs by $ 29,250
With RQI, our three CEFs give us that gigantic 6.6% income stream that I mentioned up front, or $ 49,500 in dividend income on our hypothetical nest egg of $ 750,000.
Compare that to our three ETFs holding bonds, Dow stocks, and REITs, which pay just 2.7%, or $ 20,250 in dividends on our $ 750,000. This difference of $ 29,250 clearly shows why CEE is a much better choice.
Brett Owens is Chief Investment Strategist for Contrary perspectives. For more great income ideas, get your free copy of his latest special report: Your early retirement portfolio: 7% dividends every month forever.