Actively managed closed-end funds (CEFs) can give us high yields and the kind of price upside you'd expect from stocks, explains Michael Foster, editor of CEF Insider.
A simple three-CEF portfolio made up of Liberty All-Star Equity Fund (USA), the Liberty All-Star Growth Fund (ASG) and the Nuveen Dow 30 Dynamic Overwrite Fund (DIAX) soars above most other income options because it boasts three key strengths:
1) It gives you strong US blue chip stocks for less than you'd pay if you bought them directly
2) It pays an average dividend yield of 8.1% (cutting our required savings to 12.5 years' worth from the 33 years our typical investor would need)
2) Broad diversification across the US economy
Each of the three funds focus on high-quality US equities, which have performed well over the last decade. That's helped these CEFs maintain their high dividends as their management teams take profits in bull markets, hand those gains to their shareholders as payouts, then go bargain hunting during pullbacks.
This explains why dividends for this three-CEF portfolio have risen in the last decade, with USA and ASG doing most of the heavy lifting. (ASG has offered periodic special dividends, as well).
Dividend payouts for ASG and USA tend to fluctuate. This is because these funds commit to paying out a percentage of their net asset value (NAV, or the value of their portfolios) in dividends every year: 10% in the case of USA and 8.1% for ASG.
This approach is especially timely now, as the 2022 decline has set up these funds with opportunities to pick up bargains they should be able to sell for higher prices down the road. That would translate into further dividend growth for their shareholders.
Finally, these three funds use basically no leverage. In addition, DIAX gets extra income from its covered-call strategy, under which it sells the option to buy its holdings to investors at a fixed price and a fixed date in the future. The company keeps the fees it charges for these options, whether the investor ends up buying the stock or not.
The durability of these funds is a key takeaway for anyone feeling nervous as this bear market drags on. All three funds own high-quality large-cap US firms with strong cash flows.
Thanks to the market selloff, we've got a nice long-term buying opportunity setting up in CEFs, enhancing their upside, dividend yields and overall potential as retirement investments. I don't expect these deals to last long, especially if we see better economic data in 2023.
