My Market-Crushing Income Strategy Will Have You (and Your Grandchildren) on Easy Street

In spite of the recent Fed interest rate hikes, it's a rough time to be an investor in need of an income. In fact, it has been, for a very long time, and it's only gotten marginally better.

How bad? Well, 10-year Treasury bonds are yielding just 2.7%; 30-year bonds get you just a few ticks over 3%.

Corporate paper isn't much better; you get just about 4%, unless you want to take on truckloads of interest rate risk and go exclusively into long-term bonds. That strategy will get you close to 5%, but the price of the bonds will sink like a rock if rates begin to rise over the next few years.

There just are not a lot of choices available for fixed-income investors.

But with the strategy I'm going to show you in a minute, you'll be able to solve your income problem in one fell swoop...

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REITS Are Great, but You Need Income Now

You could buy real estate investment trusts (REITS), and if I was an income-starved investor in my fifties or even early sixties, that's the way I would go. REITs have higher yields backed by real assets, and they sport a tendency to increase their dividend over time.

Now, I love REITs as they not only provide income, but for long-term investors, the total return is actually better than owning the stock indexes. In fact, if you ask me - and you just did - most investors don't have enough money invested in REITs.

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There's a catch, however: If you're in your late sixties or older right now, you might think REITs are just too risky. We're 10 years into a bull market, and the clock is ticking for some sort of correction (what we just came through wasn't "it").

Many income investors, particularly conservative ones, have a hard time handling seeing the bulk of their assets moving sharply down in price.

At the same time, selling isn't a purely rational decision; it's not the right move to make. The logical move would be to own the REITs as long as the income stayed steady, and leave the asset value question for your eventual heirs.

But I realize that's a mighty tough, maybe even impossible choice for many investors, so I'm going to share a strategy that provides a much higher interest rate - more cash in your pocket - with a margin of safety that'll actually allow you to sleep at night.

This strategy is so successful and so easy that it's only ever "hiccupped" once, and that was in 2008, when the global financial system came within a heartbeat of collapse. And even then, the central banks of the world rode in like Dudley Do-Right of the Mounties and plucked us all off the economic railroad tracks before the train hit.

The strategy went on to recover all of its losses and was back in black in less than a year, unlike the broader markets.

It's all about a special kind of investment found in one of my favorite corners of the market.

The Safest, Cheapest, Easiest Yield on the Market Is Here

Closed-end funds are mutual funds that trade on the stock exchanges and, critically, have a fixed number of shares. When you want to get your money out of a closed-end fund, you don't redeem them at the fund; rather, you sell them on the open market to another investor just as you would shares of Coca-Cola Inc. (NYSE: KO) or Microsoft Corp. (NASDAQ: MSFT).

As with any other security, lots of buying interest in a particular fund will mean higher prices, while lots of selling will lead to lower prices.

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This creates a unique opportunity. The prices will often trade up or down much faster than the value of the stocks or bonds owned by the actual fund. This leads to funds trading at a premium or discount to the actual value of what the fund owns.

I'll spare you the academic and statistical gobbledygook, but over time, discounts and premiums will tend to revert back to the actual value of the securities held by the fund.

Buying funds with higher than usual discounts and selling them when they move closer to the real underlying value has been a very successful strategy for those of us who understand it and have the patience to let it work.

Now, here's how you make it safe - really safe.

Just like with regular mutual funds, closed-end funds are available for just about every asset class. You can buy closed-end funds that invest in stocks, bonds, real estate, and even specific sectors of the market.

I've discovered the sweet spot for us: We're going to limit ourselves to buying those funds that own intermediate-term bonds with just two to 10 years until maturity. That's a relatively low-risk corner of the fixed-income market, so there will be a lot less volatility than many income portfolios.

So here's what we want to do: Buy closed-end funds when they trade at a discount to their underlying net asset value by 10% or more. Of course, we want a nice flow of income as well, so we will limit ourselves to just those heavily discounted funds that have a yield of 5%. Every three months, you will rebalance your portfolio by selling those where the discount has narrowed to less than 10% and buying any new funds that meet the criteria.

Between rebalancing sessions, there's not all that much to do besides relax and cash checks. Many closed-end funds pay monthly, so the income will be flowing in on a regular basis.

When I run the screen today, I find 13 funds that qualify. They are run by some of the best-known investment managers in the world, including Legg Mason, Blackrock, and Nuveen.

The average discount to net asset value is about 12%. An equally weighted portfolio throws off a yield of 6.86%. That is the very definition of market-crushing - and about twice what you can expect from most other intermediate-term fixed-income investments available right now.

The portfolio includes several municipal bond funds, so at least part of the mix will be federally tax-free. There are also several floating-rate funds that will see their yields go up if the Fed continues raising rates. There's even one fund that buys global government and high-quality corporate bonds, so we are partially diversified against any U.S.-specific risks. Yet another invests in very short-term corporate loans.

Your income portfolio would be spread across several sectors of the fixed-income markets with relatively short maturities. All of them have world-class management with years of experience investing in their chosen marketplace.

At this point, someone out there will want the list of funds. While I love talking about markets and sharing strategies to help folks make money, I have to save that research for my paid-up Heatseekers subscribers - it's only fair.

But I do want to share a really good one to get you started on the path to high-income, low-risk, low-anxiety investing: Nuveen AMT-Free Municipal Credit Income Fund (NYSE: NVG), which owns tax-exempt municipal bonds its management has identified as undervalued. It's trading at just shy of a 10% discount to NAV right now.

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About the Author

Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of Peak Yield Investor.

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