There is a ‘shortcut to retirement’ that too many people ignore – and it might get you hung up on it a lot sooner than you might think (and with a lot more income too).
Investing in retirement: most people get step 1 wrong
When it comes to investing in retirement, most people rely heavily on dividend-paying S&P 500 stocks, especially those with above-average dividend yields. And if you don’t want to manage a portfolio of blue-chip stocks yourself, no problem: Wall Street has you covered with the many ETFs it offers.
But that’s not the right path for a number of reasons – the main one being lame dividends!
A classic example: the SPDR S&P 500 Dividend ETF (SDY)
With this fund, you will need to invest $ 2,330,000 to get $ 4,000 per month in passive income. Sure, a middle-class worker could theoretically save that much, say, a 40-year career, but it would take very strict economy.
This is where closed-end funds (CEFs) come in: they’re single funds that hold many of the same stocks as ETFs, but the similarities end there.
For one thing, when you buy a CEF, you can easily get 8.5% returns, which is the average payout of the three funds which we’ll discuss in a moment. That’s four times more than SDY pays – and that’s a game-changer in retirement!
As you can see, with EFCs paid 8.5%, you only need to save $ 565,000 to get our monthly income stream of $ 4,000. It is much easier to obtain for a middle class worker, and it can be done much faster than 40!
Additionally, there are CEFs that invest in other assets, such as corporate bonds, municipal bonds, and real estate investment trusts (REITs) to provide a well-balanced and well-diversified portfolio that again gives you a massive passive income stream.
A 3 CEF portfolio generating a rich payment of 8.5%
Now let’s take a look at a model portfolio of just three CEFs that also allows you to achieve 8.5% income and diversification. And as we’ll see below, you don’t sacrifice performance to get that income – these three funds have crushed SDY, our low income “dividend” ETF!
Retirement choice n ° 1: a dividend of 6.3% with a peak of growth
Let’s start with the Nuveen NASDAQ 100 Dynamic Overwrite Fund (QQQX). With a focus on the NASDAQ 100 index, this CEF gives us exposure to tech giants like Apple
This payout is also 12 times higher than the virtually invisible 0.52% paid by QQQX’s ETF cousin, the Invesco Trust QQQ (QQQ)
QQQX generates this additional income with a smart strategy of writing call options on the stocks it owns (giving the fund the ability to sell its stocks at a fixed price in the future in exchange for some additional cash at the same time). advance, which it then sends to the shareholders.). This is a low risk strategy that works especially well in volatile markets, which makes QQQX particularly good holding if (when) we see a pullback in the coming months.
Retirement Choice # 2: A Fixed Income Game Generating an Incredible 10.9%
Then the Guggenheim Strategic Opportunities Fund (GOF), with a monstrous yield of 10.9%, we enter the bond world, with 97% of its portfolio in bonds.
The vast majority of its corporate bond holdings sit just below the investment grade line, where GOF managers can find the highest coupon rates available at the best deals. The fund is also diversifying into fixed income with investments that include asset backed securities, bank loans, preferred stocks and municipal bonds. Guggenheim himself also brings great expertise in these areas: the company manages $ 245 billion in assets and has a 200-year history.
Retirement choice n ° 3: A high and regular payment from a CEF manager
Finally, we will add the PIMCO Corporate & Income Opportunities Fund (PTY). The fund’s management company, PIMCO, is one of the titans of the CEF world, and one of the biggest buyers of bonds, which gives it unparalleled expertise.
PTY, for its part, invests in a variety of real estate-backed assets and government bonds – a combo that gives us a dividend that is both high, at 8.3%, and stable, held at 13. cents per share, paid monthly, for the past nine years.
CEFs beat ETFs in dividends and long-term returns
The bottom line here is, as I said above, that these three CEFs not only generate more income (and give you a more diversified portfolio) than what you would get from just SDY dividend paying stocks. , but you also get total return, too.
Over the past five years, each of these funds has crushed SDY by at least a 40% margin. And all three of them have posted an average annualized total return of 11% over the long term.
The bottom line? CEFs are, without question, a much better alternative to ETFs if you want to become financially independent faster (and who doesn’t?). And with almost 500 CEFs, with many different strategies, there is one for just about every type of investor.
Michael Foster is the senior research analyst for Contradictory perspectives. For more great income ideas, click here to view our latest report “Indestructible Income: 5 trading funds with safe 8.3% dividends.“