{"id":67178,"date":"2023-09-30T07:52:36","date_gmt":"2023-09-30T11:52:36","guid":{"rendered":"https:\/\/ifintechworld.com\/markets\/this-monthly-paying-mini-portfolio-delivers-11-1-each-year\/"},"modified":"2023-09-30T07:52:38","modified_gmt":"2023-09-30T11:52:38","slug":"this-monthly-paying-mini-portfolio-delivers-11-1-each-year","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=67178","title":{"rendered":"This Monthly-Paying Mini-Portfolio Delivers 11.1% Each Year"},"content":{"rendered":"
\n

It\u2019s a great time to be an income investor. We have yields averaging 11.1%<\/em> staring us in the face.<\/p>\n

All we need to do is step past the broader fear, and we can dial in these dynamic dividends. Which oh by the way, pay us monthly<\/em>.<\/p>\n

To do so we\u2019ll look past traditional ETFs in favor of select closed-end funds (CEFs). These vehicles simply pay more than popular funds. Plus, they tend to be more closely managed\u2014a good<\/em> thing in manic markets like these.<\/p>\n

Getting paid every 30 days smooths out our dividend income. This is what a vanilla portfolio of quarterly payers looks like. It\u2019s a mess!<\/p>\n

Now, look at a monthly dividend portfolio that pays almost exactly the same amount annually, just in even, monthly distributions:<\/p>\n

<\/fbs-ad><\/p>\n

That\u2019s more like it. But securing 11.1% in monthly dividends isn\u2019t as easy as reading this column and punching in a few tickers. We contrarians must be careful. Some of these funds are cheap for a reason.<\/p>\n

The dangerous dividends are funded by a heavy use of debt\u2014aka leverage. This can work out well when rates are low, but it\u2019s trouble when rates rise.<\/p>\n

So, let\u2019s you and I review a four-pack of funds\u2014averaging 11.1% yields\u2014with our low leverage requirement in mind.<\/p>\n

Eaton Vance Tax-Advantaged Dividend Income Fund (EVT, 8.5% distribution rate)<\/strong>, which invests in value-oriented dividend stocks with a penchant for dividend growth.<\/p>\n

It\u2019s funny. When you hear \u201ctax-advantaged,\u201d you probably think \u201cmunicipal bonds,\u201d but that\u2019s not the case with EVT. Instead, this CEF simply buys common and preferred stocks that distribute qualified dividends (i.e., dividends that enjoy the more favorable long-term capital gains tax rates), the likes of which include JPMorgan Chase (JPM)<\/strong>, Constellation Brands (STZ)<\/strong> and ConocoPhillips (COP)<\/strong>.<\/p>\n

The good news is, EVT fits the bill\u2014its roughly 21% in leverage is certainly on the low side for a closed-end fund. Unfortunately, that leverage doesn\u2019t buy you much in the way of performance.<\/p>\n

If there\u2019s any upshot, it\u2019s that EVT is trading at a 7%-plus discount to NAV\u2014roughly thrice<\/em> its historical discount.<\/p>\n

BlackRock Capital Allocation Term Trust (BCAT, 10.8% distribution rate<\/strong>) offers a wild yield of nearly 11% despite being a pretty plain-Jane allocation fund (read: stocks and bonds) and utilizing just 5% leverage. That leverage allows it to have an asset blend of more than 100%\u2014equity exposure is at 56%, while bond exposure is at 46%.<\/p>\n

BCAT\u2019s an interesting bird. Your typical CEF is a \u201cperpetual\u201d fund, which means it will just keep on keepin\u2019 on. But BCAT is a \u201cterm\u201d trust, which means it has a limited shelf life. The fund came to life on Sept. 25, 2020, and will wind down 12 years from then\u2014so, in 2032. With target-term CEFs, management is aiming to deliver a target NAV back to investors by the time the fund terminates. Interestingly, these funds also tend to hold bonds that are similar in maturity to their expiration date\u2014and so does BCAT, with the lion\u2019s share of its fixed-income portfolio invested in bonds that mature in 5 to 10 years.<\/p>\n

Sadly, management has dropped the ball thus far. Allocation funds are designed to provide asset diversification where, say, strength in stocks can cover for weakness in bonds, or vice versa. But in this case, BCAT\u2019s greater-than-50% allocation to stocks hasn\u2019t done anything to counter fragility in its fixed-income portfolio. For comparison\u2019s sake, here\u2019s how BCAT has performed compared to the iShares Core Moderate Allocation ETF (AOM)<\/strong> and the Agg bond index.<\/p>\n

Brookfield Real Assets Income Fund (RA, 11.7% distribution rate) <\/strong>offers a massive yield of nearly 12%, uses a light 17% in leverage and is trading at a dirt-cheap 16% discount to its net asset value\u2014crazy talk for a CEF that, on average, has traded at a slight premium<\/em> to NAV.<\/p>\n

If it seems almost too good to be true, that\u2019s because it is.<\/p>\n

Despite its \u201creal assets\u201d moniker, the fund is almost completely invested in credit\u2014and just 30% of the fund is invested in infrastructure-related credit. The lion\u2019s share of assets are invested in real estate bonds and mortgage-backed securities.<\/p>\n

Here\u2019s what I had to say about the fund when I sold it from my Contrarian Income Report<\/em> service in November 2018:<\/p>\n

\n The fund\u2019s generous distribution (10%+) and equally generous discount (6% to 9%) gave us a margin of safety while we awarded their promising management team time to dial in their strategy. But to be blunt, they haven\u2019t. <\/em>\n<\/p><\/blockquote>\n

<\/blockquote>\n

\n Their average coupon today pays just 4.8% while they\u2019re on the hook for a 10.4% distribution on NAV. Borrowing cheap money helps fill some of the gap but not enough of it. And the portfolio remains too heavily focused on fixed-rate and longer-duration bonds for my liking. <\/em>\n<\/p><\/blockquote>\n

<\/blockquote>\n

\n Let\u2019s take our modest 1% total returns and move on.<\/em>\n<\/p><\/blockquote>\n

In the roughly five years since then, the monthly dividend remained constant while its NAV plunged. And finally, in September, reality came to the fore\u2014Brookfield\u2019s CEF cut its distribution by 41%, and shares cratered.<\/p>\n

I do<\/em> think our best opportunity now is in fixed income, however\u2014just not in second-rate funds like RA. While today\u2019s hysteria would lead you to believe rates will never top out, they will, and we should put together a wish list for when that happens.<\/p>\n

FS Credit Opportunities (FSCO, 13.3% distribution rate)<\/strong> has been around for nearly a decade, but it listed less than a year ago, in November 2022, and has made a splash since then.<\/p>\n

FS Credit Opportunities invests in \u201cnon-traditional\u201d public- and private-market credit. Right now, for instance, roughly 60% of the fund is invested in senior secured loans, 17% is in senior secured bonds, and another 7% is in subordinated debt. (Equity and asset-based finance make up the rest.) And it uses relatively light 17% leverage.<\/p>\n

The only difficulty with investing in FSCO is its lack of public track record. It trades at a whopping 26% discount to NAV, but given that it has only been trading for a year, it\u2019s hard to say if that will thin out (and squeeze prices higher) or if FSCO will be a perpetually cheap fund.<\/p>\n

Brett Owens is chief investment strategist for <\/em>Contrarian Outlook<\/em>. For more great income ideas, get your free copy his latest special report: <\/em>Your Early Retirement Portfolio: Huge Dividends\u2014Every Month\u2014Forever.<\/p>\n

Disclosure: none<\/em><\/p>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

It\u2019s a great time to be an income investor. We have yields averaging 11.1% staring us in the face. All we need to do is step past the broader fear, and we can dial in these dynamic dividends. Which oh by the way, pay us monthly. To do so we\u2019ll look past traditional ETFs in […]<\/p>\n","protected":false},"author":1,"featured_media":67179,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[241],"tags":[83],"class_list":["post-67178","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-markets","tag-featured"],"yoast_head":"\nThis Monthly-Paying Mini-Portfolio Delivers 11.1% Each Year | iFintechWorld<\/title>\n<meta name=\"description\" content=\"It\u2019s a great time to be an income investor. We have yields averaging 11.1% staring us in the face. 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