I’m sure I don’t have to tell you how tough it is to build a dividend retirement portfolio that provides a decent yield these days.
Many investors make utility stocks a cornerstone, but that strategy is less appealing this year, with many utilities’ valuations stretched and their yields well below long-term averages.
Take Duke Energy (DUK), America’s biggest utility by market value, whose trailing-twelve-month P/E ratio has climbed to 20.1 from 17.8 at the start of the year. Meantime, its yield has slumped to 4.1% from 4.5%.
Duke Gets Pricey
The New Cornerstone of Your Dividend Retirement Portfolio
But fear not, there’s another group of investments boasting even higher yields than utilities; I’m talking payouts of 6% and up.
[ad#Google Adsense 336×280-IA]Better yet, many trade at deep discounts—and most investors completely ignore them.
I’m talking about closed-end funds (CEFs). They’re often confused with open-end funds—or what most people call mutual funds—but they’re way better than those stodgy old standbys.
One reason why is that CEFs trade on the stock market, just like regular stocks.
Unlike open-ends, where you buy and sell units through the fund itself, CEFs don’t have to handle inflows and redemptions, so the manager isn’t handcuffed by the need to pull out cash to pay off skittish investors when the market tanks.
So if you pick CEFs with strong managers—like the three I’m about to show you—you get the benefit of their full talent.
A side benefit? Many CEFs pay dividends monthly.
Dividend Retirement Portfolio Pick #1
One way CEF managers boost their yields is through leverage—borrowing funds at today’s low rates and reinvesting it in their portfolios.
Of course, leverage works both ways, magnifying your gains in a rising market but also amping up your losses when the market takes a tumble. That’s why you’ll want to focus on CEFs that employ a modest amount of leverage to juice their returns.
Case in point: the Gabelli Dividend & Income Trust (GDV), where fund manager Mario Gabelli is allowed to borrow up to 20% of the fund’s net asset value (NAV). The result is a portfolio of dividend payers with growth potential, like Verizon Communications (VZ), Wells Fargo & Co. (WFC) and Honeywell International (HON) that combine to throw off the fund’s spectacular 7% annualized yield.
Another big plus is the discount to NAV at which most closed-ends trade (12% in GDV’s case). This is like getting $1.00 of assets for $0.88, and it’s a clear benefit over open-end funds because it sets you up for a nice gain as the discount narrows—a near certainty in Gabelli’s case.
And in case you’re wondering, yes, some closed-ends do trade at a premium to NAV, though it’s rare and usually reserved for rock star managers and hot ideas. The PIMCO High-Income Fund (PHK), for example, trades at an incredible 49% premium to NAV.
You read that right: some people will actually pay $1.49 for every $1 of assets! I’d rather not start that far behind the eight ball, especially when there are plenty of bargain CEFs to pick from, which is why I recommend steering clear of the PIMCO High-Income Fund now.
But here are three more solid picks for a retirement portfolio. Two are CEFs, and I’ve also included an exchange-traded fund (ETF) to give you low-fee access to another often-misunderstood asset class: preferred shares.
Dividend Retirement Portfolio Pick #2
The Eaton Vance Global Dividend Income Fund (ETG) yields 8.6% today and matches up nicely with the Gabelli Fund, instantly giving your retirement portfolio a healthy exposure to international stocks.
Don’t get too hung up on the “global” in its title. Most of the fund’s holdings (65%) are stable European dividend-payers like chemical producer BASF SE (BASFY) and Allianz SE (AZSEY).
And while ETG doesn’t break out its China holdings, the entire Asia/Pacific region accounts for just 5.6% of the fund’s portfolio, so you won’t have to worry about the Red Dragon’s wobbly economy torching your nest egg.
Meantime, ETG trades at a 10.5% discount to NAV, well above its five-year average of 6.3%, so you’ll pull in a gain of more than 4% as it makes its way back to that level. Plus ETG’s use of leverage is modest, at just 25% of the portfolio.
ETG’s Hefty Discount
Source: Morningstar
Dividend Retirement Portfolio Pick #3
BlackRock Utility and Infrastructure Trust (BUI): No matter who wins the election in November, one thing is clear: demand for water, energy and improved roads and bridges will keep rising.
That means this fund is riding a bullish trend that will continue for decades, at least. Its top 10 holdings include renewable power–focused utility NextEra Energy (NEE), master limited partnerships like Dominion Midstream Partners (DM) and water companies like American Water (AWK).
Even better, it’s trading at a 10% discount to NAV, near a five-year high. BUI has been known to trade at premiums above 3%, so you can bank on that gap narrowing in the years ahead. Meantime, you’ll be pocketing the fund’s juicy dividend, which yields 8.1% and gets dropped into your investment account every month.
Dividend Retirement Portfolio Pick #4
I like preferred shares because they pay a fixed dividend rate, are less vulnerable to dividend cuts than common shares and tend to trade in a narrow range, adding further stability to our four-stock retirement portfolio.
Consider the iShares U.S. Preferred Stock ETF (PFF), which lets you hold preferreds from blue chips like Allergan (AGN) and Wells Fargo (WFC) for a reasonable fee of just 0.47% of assets.
The fund yields 5.6%, below our three CEF picks but still nearly triple what you’d get from the average S&P 500 stock. And it gives your portfolio ballast when a market storm whips up, with a beta rating of just 0.26, meaning it’s 74% less volatile than the S&P 500.
— Brett Owens
A “Set-It-and-Forget-It” Portfolio With a 9.1% Yield and 25% Upside [sponsor]
If you think a 7.3% yield would make a huge difference to your retirement portfolio, consider the three other closed-ends I’ve found: they throw off yields of 8.0%, 8.4% and even 11%! So if you separated them out into their own portfolio now, they’d deliver an average yield of 9.1%. That’s 25% higher than the four-pack of funds I just showed you and four times the S&P 500 average.
They’re perfect for retirement investing because even if the S&P 500 drops 30%, it’s already priced in, so these top-notch funds would simply trade flat… but we’ll still collect those fat 8% to 11% yields. Best case, they’ll return 20%, and with their gaudy 8% to 11% payouts, we’d be looking at gains of 8% to 31% over the next 12 months! I’m a bit more conservative, mind you, so I’m anticipating gains of “only” 16% to 25%.
These three ironclad investments are trading at deep discounts to NAV right now, but that’ll change fast as other investors realize what they’re missing and pile in. Don’t be left behind. Go here and I’ll give you more information on these three bulletproof retirement picks now.
Source: Contrarian Outlook