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Calculator with money – Interest
When we’re faced with a situation like today’s, with inflation and interest rates on a tear, we want dividends that keep us ahead of rising prices while hedging us against volatility.
Luckily, there’s a selection of high-yield closed-end funds (CEFs) that do just that. We’re going to look at three that yield 9.9% on average today, plus they give us the diversification we need to withstand market shocks.
And with a 9.9% yield, you could use these stout income generators to pay your bills on a modest investment, avoiding the need to sell into a downturn to augment your income. Heck, a retiree with $500K could generate $4,125 a month in dividends!
“Rate-Resistant” Pick No. 1: A Diversified 12.2% Dividend Paid Monthly
Let’s start with the Aberdeen Income Credit Strategies Fund (ACP), the biggest yielder of our trio, at 12.2%. ACP is particularly attractive because of its strategy: it holds floating-rate loans, which, as the name says, rise with interest rates.
So right off the bat we’ve got two things in our favor: a high dividend (paid monthly, no less) and a portfolio that benefits from rising rates. The other thing that makes ACP stand out, from a safety perspective, is its global diversification, which reduces exposure to a potential slowdown (inflation-driven or otherwise) in any one country:
ACP Country Exposure
So if you’re looking for a reliable inflation hedge and a fund that’s built to handle a market pullback, ACP is a good place to start.
“Rate-Resistant” Portfolio Pick No. 2: An 8.8% Payout From Global Stocks
Next, let’s stick with a global theme but go with stocks instead of bonds, both to complement ACP and because equities have historically generated higher returns than debt over the long term.
A good choice here is the Eaton Vance Tax-Managed Global Buy-Write Opportunities Fund (ETW), which has generated a 9.2% annualized total return in the last decade.
Because ETW rotates its holdings according to which stocks are on the rise at any given time, it can sell, for example, some Apple
(MSFT) or Amazon
(AMZN)—all three are top ETW holdings—as those stocks rise and rotate into other holdings, like Nestle (NSN), ASML Holding (ASML) and Roche (ROG). It also sets some of its profits aside to pass on to investors as dividends.
This is how ETW has maintained its 8.8% yield, and with the fund’s track record, despite the market’s recent selloff, it looks poised to sustain those payouts while being positioned to profit as investors (inevitably) flip back from fear to greed.
The kicker? Like ACP, this fund pays dividends monthly, so they fall right in line with your bills; monthly payouts also let you reinvest your dividends faster than quarterly payouts do.
“Rate-Resistant” CEF No. 3: An 8.6% Dividend Run by a Wall Street Pro
Finally, let’s take a fund based in the US, where investors have seen the most reliable share-price growth over the last century. We can do this with the Gabelli Equity Trust (GAB), a US-focused fund with a keen focus on value.
Legendary value investor Mario Gabelli runs GAB and looks closely at companies’ cash flow and earning potential before making a buy. This is why GAB holds firms with high profit margins and long histories of returning cash to shareholders, such as Rollins (ROL), Texas Instruments
(TXN) and Republic Services
(RSG). Choices like these have paid off handsomely for Gabelli and his investors.
This chart speaks for itself. With a whopping 13.6% annualized return over the last decade, GAB has shown that value investing pays off. Plus its recent resilience (it’s about flat year to date, versus the broader market being down 6%) demonstrates how bargain stocks can hedge your portfolio in a downturn (because, after all, it’s hard for a stock that’s already cheap to get cheaper!).
And thanks to its 8.6% yield, GAB is essentially passing through the cash flow from its profitable, successful companies straight to you.
Michael Foster is the Lead Research Analyst for Contrarian Outlook. For more great income ideas, click here for our latest report “Indestructible Income: 5 Bargain Funds with Safe 7.3% Dividends.”