Eventually, a reliable vaccine
will be developed, the coronavirus will be history, and we’ll again
be able to pick stocks based on the relatively predictable factors
that we used before, which for me, was expected revenue and earnings
growth.
In the
meantime, I’m
going to suggest a portfolio of four closed-end funds
that will pay you monthly dividends
equating to 8% to 10% dividend yields
while you wait.
About Dividend Yields
Dividend yield is similar to
the annual interest rate that you receive on a money market or
savings account. Calculate it by comparing the annual dividends you
receive to the price you paid for the stock or fund. For instance,
your annual dividend yield would be 10 percent if you paid $10 per
share for a stock or fund paying $1 annually.
While the closed-end funds I’m
going to describe are paying yields much higher than the 1% or so
banks are currently paying, the downside is that your investment is
not U.S. Government insured. You could lose everything in a total
market collapse.
Closed-End Funds (CEFs) Explained
CEFs are similar to
conventional mutual funds. However, unlike conventional funds that
create new shares as needed, CEFs only issue a fixed number of
shares at the IPO, and after that, those shares trade on the open
market just like stocks.
Unlike ETFs, CEFs can use
leverage (borrowed funds) to enhance returns. For instance, they
might borrow at 2% to purchase bonds returning 4%. That’s why
closed-end funds typically outperform ETFs focusing on the same
market sector.
For instance, my Dividend
Detective newsletter tracks both high-income CEF and ETF portfolios.
Last year, the ETF monthly income
portfolio returned 17 percent compared to 35 percent for the
closed-end fund portfolio.
Premium vs. Discount
While conventional mutual
funds and ETFs trade close to the per-share value (net asset value
or NAV) of their holdings, closed-end funds might trade at a premium
(above) or discount (below) their NAVs. Well-known CEFs trade
sometimes trade at substantial (20% to
50%) premiums. It best to avoid those and stick with funds either
trading below their NAVs or at small premiums (less than 10
percent).
Four High-Yielding Monthly
Payers
These top performing funds
(based on three-year returns) recently traded near their net assed
values and are paying monthly dividends equating to 8.0%
to 10% yields.
AllianzGI Diversified
Income & Convertible (ACV):
holds
a mix of stocks, corporate bonds, some convertible into equity, and
preferred stocks.
The fund returned (dividends plus capital gains) 10% over the past
12 months and averaged 13% annually over the past three-years. Pays
an 8.7% dividend yield.
Tekla World Healthcare
(THW): Holds healthcare related equity and debt securities. Returned
28% over the past 12-months and averaged 11% annually over three
years, 9.6% dividend yield.
Calamos Strategic Total
Return (CSQ): Holds mostly U.S.-based stocks, convertible
securities and high-yield corporate bonds. Returned 9% over 12
months and averaged 10% annually over three years,
8.9% yield.
Calamos Convertible & High
Income (CHY): holds a mix of convertible (to stocks) bonds and
non-convertible below investment grade bonds. Returned 15% over
12-months and averaged 8% annually over three years,
9.1% yield.
As always, historical performance doesn’t predict the
future. Do your own research. The more you know about your funds,
the better your results.
published 6/22/20
