The Fed Is Still Clobbering Savers, Try These 11.1% Dividends Instead

Forget the latest blather from the Fed: folks just trying to get a decent income stream are still getting a raw deal these days. Treasuries pay 3.7%. Stocks? Just 1.6%.

Too bad inflation is at 4%, so our real returns are negative on both!

Sure, stocks do give us price upside, but we have to sell to get a decent income stream, shriveling our portfolio and our dividends as we do.

We can do better with high-yielding closed-end funds (CEFs). These days, plenty of CEFs yield 10%+. The three we’ll cover below do even better, yielding 11.1% on average. That means these CEFs are beating the S&P 500’s historical return in dividends alone.

While there are a lot of other high-yield alternatives out there—royalty trusts, master limited partnerships (MLPs), junk bonds and the like—CEFs have three things that put them at the head of the class:

1. High-quality assets: CEFs, including the ones I’m about to show you, invest in multi-billion-dollar public companies like Amazon.com (AMZN), Apple (AAPL), Starbucks (SBUX) and Wells Fargo (WFC).
2. Diversification: Most CEFs have hundreds of millions of dollars in assets, or even into the billions, so they can use their heft to buy hundreds of different stocks, bonds and other assets. That gives us a lot of diversification in just one (or a handful of) funds.
3. Big discounts: A CEF can’t issue new shares to new investors after its IPO, which simply means that it can trade at different prices (and often discounts) to its net asset value (NAV, or the value of its underlying portfolio). When we buy at a discount, we get a source of upside as it closes, driving the fund’s price higher.

So, with these principles in mind, here are three CEFs you can buy now for an 11.1% average yield, diversification and exposure to high-quality American stocks, corporate bonds and global real estate. They sport attractive valuations, too.

CEF Pick No. 1: A 9.7% Payer That Smartly Played the Tech Crash (and Rebound)

Our first stop is a fund I cover a lot: the Liberty All-Star Equity Fund (USA), which has been closely matching the S&P 500’s performance lately. That’s both surprising—because USA yields 9.7%, or about six times what the S&P 500 yields—and unsurprising, because USA is a mostly large-cap US equity fund.

USA’s Sleeper Outperformance

Note how USA was outperforming the S&P 500 up until 2022, when its outperformance disappeared. Here’s why:

With tech getting hit hard in 2022, USA’s managers saw an opportunity and added to their holdings in the sector. That’s why the fund’s outperformance has vanished lately, but it’s also why it’s likely to return.

One other thing to note is that USA has a unique dividend policy under which it will pay 10% of its net asset value (NAV) per year as dividends, in four installments of 2.5% each. That makes the payout less predictable but also gives management flexibility to buy bargains when it spots them, as it did last year.

Finally, the discount: as I write, USA trades for 1.3% below NAV. That doesn’t sound like much, but this fund has traded at a premium for most of the last year, as we can see in the chart below, which bodes well for upside in the discount—and the price—in the months ahead.

USA Goes on Sale

CEF Pick No. 2: An 11.2% Payer That Crushes Stocks (and Bonds)

Our next fund is the corporate bond–focused PIMCO Corporate Income Opportunity Fund (PTY), which has been blowing past the S&P 500 (in purple below) for years, as well as its own corporate-bond index (in blue).

PTY Takes on All Comers

It’s rare for a bond fund to beat stocks over the long run, but there you have it. And PTY delivers a healthy income stream, with its 11.2% yield. That payout has been remarkably steady over the life of the fund, only shifting a bit in that span:

PTY’s Strong Dividend

The spikes and dips in the chart above are what we’re really interested in: they’re special dividends, which, as you can see, PTY drops on the regular. That essentially means the 11.2% PTY yields now is a floor, not a ceiling.

Finally, if you look up PTY on a CEF screener, you might see that it trades at an 18% premium to NAV. Why would we pay $1.18 for every dollar of this fund’s assets?

The answer is that with discounts and premiums, we need to look at the current figure in relation to history. And we can see in the chart below that, over the past five years, PTY has traded at much higher premiums (its average over that span is 23%):

PTY’s Premium Is Really a Discount

That means we really have a discount in disguise here—and one that looks appealing to step into.

CEF Pick No. 3: A 12.4% Dividend to Play the Coming Interest-Rate Rollover

Let’s round things off with the Abrdn Global Premier Properties Fund (AWP), which invests in real estate investment trusts (REITs) from across the economy, from industrial plays like Prologis (PLD) to data centers such as Equinix (EQIX) and self-storage firms like Public Storage (PSA).

And while the benchmark REIT ETF, the Vanguard Real Estate ETF (VNQ) yields just 3.4% today, AWP does a lot better, handing us a 12.4% dividend that pays monthly. The payout has held steady through the pandemic and the rise in interest rates we’ve seen in the last couple of years, which has been particularly hard on REITs.

AWP is run by one of the best global asset managers: Aberdeen Asset Management. However, it wasn’t always great; before Aberdeen bought the fund in 2018, its previous management had underperformed, resulting in a push for change. Since then, AWP’s discount has gone from an average of 18% to an average of 6%—until the dip in the last few weeks.

That dip is an opportunity to get into this fund and enjoy its 12.4% yield, its diversification and a likely rebound in REITs as rates level off and, eventually, fall.

Put it all together and you have a three-fund portfolio that gets you stocks, bonds and real estate with three good but different reasons to buy each one: pick up AWP for the (likely short-lived) dip in its discount, PTY for its stock-crushing outperformance and USA to ride the ongoing tech bounce. You’ll also get a robust 11.1% average yield for your trouble, plus “bonus” upside from these funds’ attractive valuations.

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 Steady 10.4% Dividends.”

Disclosure: none