Most folks think retiring on $527K is a dreamâ€”but most folks havenâ€™t heard of high-yield closed end funds (CEFs). With yields as high as 22%, these unsung income plays can fast-track your race to financial independence.
Hereâ€™s how: letâ€™s say youâ€™re looking to clock out and use your portfolio to replace $50,000 in yearly employment income. Many financial advisors will tell you that the most you can withdraw out of a conservative stock portfolio is 4% a year (this is known as the 4% safe withdrawal rate). Simple math tells us that this means you will need $1,250,000 to retire.
High-yield investments like CEFs turbocharge that because weâ€™ll need less capital to get that $50,000 annual income stream. If we can find an investment giving us a 5% yield, we only need a million, so we could reduce the amount weâ€™d need to save by $250,000. And if we can get higher yields, we can cut it down even more.
The Bigger the Yield, the Less Needed to Save
So it follows that a retiree who finds a 7% passive income stream needs half a million dollars less than a retiree blindly following their financial advisor.
But is a safe 7% dividend stream possible? With CEFs, the answer is a resounding yes.
CEFs are designed to invest in familiar assetsâ€”stocks, bonds and real estate investment trusts (REITs), for exampleâ€”but are professionally managed to buy and sell assets at the best possible time to hand out a high income stream to investors. The best CEFs yield 7% or more and have done so for over a decade without cutting their payouts.
A Massive Income Boost
As you can see above, the average CEF yields 7.4% today, nearly four times more than the S&P 500â€™s average payout. Plus, CEFs are diversified across many different asset classes, including municipal bonds, corporate bonds and stocks in various sectors and countries, so you can build a portfolio of several different funds and get a diverse mix of assets while still getting a retirement-level income stream.
And we can do better than 7.4%. With many high-quality CEFs paying more than that, we can boost our dividends up to over 9% without breaking a sweat.
A Diversified 4-CEF Portfolio Yielding 9.5%
Take, for instance, this 4-fund portfolio: the AllianzGI Convertible & Income Fund (NCZ) for corporate bonds, the Cohen & Steers Infrastructure Fund (UTF), for utilities, the Gabelli Equity Trust (GAB), for stocks and the Guggenheim Taxable Municipal Managed Duration Trust (GBAB), for municipal bonds.
Combined, that gets us a portfolio with a 9.5% dividend yield and an annualized return of 9.9% per year.
High Income, Steady Returns
So, with just these four funds, weâ€™ve created a high-yield CEF portfolio that can get us into retirement with $50,000 in annual income on just a $527K investment.
And these arenâ€™t even the best CEFs out there! There are plenty of others you can combine into a diversified portfolio that pays a massive yield. This is one reason why these little-known funds are the income investorâ€™s short cut to a worry-free retirement.
Michael Foster is the Lead Research Analyst for Contrarian Outlook. For more great income ideas, click here for our latest report â€œIndestructible Income: 5 Bargain Funds with Safe 11% Dividends.â€
I have worked as an equity analyst for a decade, focusing on fundamental analysis of businesses and portfolio allocation strategies. My reports are widely read by
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